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MNI (London)
By Hiroshi Inoue
     TOKYO (MNI) - February's slowing nationwide inflation is no surprise to
Bank of Japan officials and the data released Friday underlines that consumer
prices remain slow to respond to tight labour market conditions, MNI
understands.
     The data, showing nationwide core consumer price index rose 0.7% on year,
reconfirmed that Japan's CPI remains sluggish and hasn't gained the traction the
BOJ had previously expected, as structural factors, including adverse
demographics, continue to impede higher prices.
     There are concerns at the BOJ that the inflation rate will slow further in
coming months, as the influence of higher oil prices in 2018 continue to fall
out of the index. February's core CPI saw the positive contribution from energy
prices fall to 0.34 percentage points from 0.37 percentage point in January and
from 0.45 percentage point in December.
     --AMPLIFIED CONCERNS
     Those BOJ outlook concerns will likely be amplified as Japan's economy
slows with few indications of when the economy will regain upward momentum.
     Ongoing weak consumer price moves will make it difficult for the BOJ board
to continue predict hitting their 2% price target by FY2021, with some officials
believing the release of the updated medium-term economic growth and inflation
forecasts in April will just underline that dilemma.
     Although momentum toward achieving the 2% price target is key to the BOJ
considering further  policy action, it is unlikely that any extension to the
timeframe will trigger policymakers to immediately consider further easing,
firstly as questions still remain over the impact of current policy and
secondly, the BOJ is loathe to use its remaining ammunition lightly.
     Nationwide core consumer price index rose 0.7% for the 26th straight rise
in February, but decelerated from January's 0.8%. The data was below
expectations, as the earlier released Tokyo CPI -- seen as a lead indicator for
the national data -- pointed to no change from the previous month.
     --OUTPUT GAP
     Bank Governor Haruhiko Kuroda has repeatedly said that it is important to
maintain a positive output gap -- a driver for higher inflation -- for as long
as possible in order to achieve the target.
     Japan's estimated positive output gap narrowed to 1.24 percentage points in
the July-September quarter from 1.60 percentage points in April-June, the BOJ
data showed, the eighth straight quarter in positive territory.
     The positive gap is expected to increase upward pressure on both consumer
prices and inflation expectations, with a lag of a few quarters, which will be
boosted by an expected widening in the October-December quarter.
     But a slowing of the economy in the first quarter of 2019 will likely
reverse some of that gain in the output gap, further weighing on the BOJ's
outlook. 
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
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MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com