MNI INSIGHT: Slower Japan Feb CPI Threatens BOJ 2% Target Date

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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