MNI INSIGHT: Jan CPI Higher, But BOJ Caution Over Future Moves

--Japan Core CPI Up 0.8% Y/Y in Jan Vs. +0.7% in Dec

By Hiroshi Inoue

     TOKYO (MNI) - January's modest uptick in core nationwide inflation will be

a welcome sight for the Bank of Japan, but falling crude oil prices will

continue to weigh in coming months and officials are still eyeing expectation

levels with concern, MNI understands. 

     Consumer inflation expectation levels have been more or less unchanged in

recent months, but there is a worry that they will decline as fuel prices fall

at the pumps, which will help weaken momentum toward achieving the 2% price

target.

     January's positive contribution from energy prices was 0.37 percentage

point, slowing from 0.45 percentage point in December and 0.61 percentage point

in November, with BOJ officials seeing it slow further in the months ahead.

     Despite the continuing tight labour market and the output gap remaining in

positive territory, inflation hasn't picked up to levels BOJ officials expected,

as firms remain cautious about raising retail price.

     The BOJ still see the mechanisms from higher personnel costs increasing

pressure on firms to raise their retail prices as still working, although they

accept that deeply entrenched views means neither wages or prices will rise

easily or quickly.

     The ongoing caution seen in wage- and price-setting by companies, along

with continuing household concern over higher prices, has clearly not yet

changed, making it difficult for firms to raise retail prices.

     The real wage gap, which is defined as the deviation of real wages from

labor productivity, has remained at a low level, and this is contributing to

pushing down price rises, the BOJ analyzes.

     --CORE CPI ACCELERATES

     Japan average core CPI excluding fresh food and energy item rose 0.8% on

year in January, the 25th straight year-on-year rise, and the pace accelerated

from +0.7% in December and was in line with the MNI median forecast of +0.8%.

     The Tokyo core CPI, a leading indicator of nationwide CPI, rose 1.1% on

year in January, accelerating from +0.9% in December and indicating the rise in

the nationwide core CPI in January from December's +0.7%.

     Goods prices excluding volatile fresh food prices rose 1.1% on year in

January, with the pace of increase slowing from December's 1.2% gain. The pace

of increase in overall goods prices was -0.1% in January, slowing from +0.2% in

December.

     --SLUGGISH KEY PRICES

     Prices for processed food (canned food, bread, snacks, beverages, etc.),

which accounts for 15% of the total CPI that BOJ officials are focused, rose

0.5% on year in January, unchanged from a 0.5% gain in December. The index

indicated that firms remained cautious about raising their retail prices despite

higher energy and labor costs.

     Prices for eating out rose 1.1% on year in January, after rising 1.1% in

December, indicating that upward pressure on the service prices from higher

labor and material costs continues, but hasn't increased.

     The next key data is the Tokyo CPI for February, due out on March 1.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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