MNI POLICY: Aug CPI Fuels BOJ Concern Over Weaker Growth View

Weaker August CPI data was no great surprise to Bank of Japan officials, but the magnitude of the decline was certainly at the lower end of expectations and has increased concerns for their growth forecasts and inflation expectations, MNI understands.

Despite the negative reading for core inflation, the first negative reading in three months, the BOJ is unlikely to adjust monetary policy to address the issue at present, concentrating instead on maintaining stability across financial markets and ensuring flows of funding to corporates

--CORE-CORE CPI PLUNGES

August core CPI fell 0.4% y/y for the first drop in three months after being unchanged in July and June. It is the lowest reading for the annual core CPI since May 2013, when it also fell 0.4%.

Core-core CPI, excluding fresh food and energy items, the BOJ's preferred gauge of the underlying trend, 0.1% y/y in August, recording the first decline in 38 months to the lowest since March 2017, when it also fell 0.1%.

The decline in inflation rates was mainly due to the plunge in accommodation costs triggered by the government's "Go To Travel" campaign, with government subsidies lowering overall costs at hotels and the like. Although the BOJ sees the travel cost impact as temporary, they still expect the key inflation rates to be negative for a while, weighed by Covid-19 and oil price weakness.

Overall accommodation prices fell 32.0% y/y in August, widening from a 4.5% dip in July. The negative contribution from accommodations widened to 0.42 percentage point from 0.05 pp in July.

WEAKER SERVICE, SOLID EATING OUT

Service prices also fell 0.1% y/y in August, reversing from the 1.0% gain seen in July. The contribution turned to -0.05 pp in August from +0.36 pp in July. Prices for eating out, another key BOJ focus, remained firm, up 2.9% y/y in August after a similar 2.9% rise in July.

BOJ officials noted the rise in service prices despite being the sector hardest hit by the coronavirus pandemic, believing that firms which would cut prices to stimulate demand during previous deflationary periods, have not yet acted.