MNI POLICY: Japan Dec CPI Drops 1.0%; Biggest Since Sep 2010

A weaker December core consumer price index was no great surprise to Bank of Japan officials who were expecting the inflation rate to continue in negative territory, MNI understands.

Bank officials expect the drop of prices to hit bottom in or after the first quarter of 2021, unless fresh factors emerge to put downward pressure on prices.

However, bank officials are paying attention to how prolonged weak core CPI increases downward pressure on the medium to long-term expected inflation rate, and the growth expectations on which bank officials are focused.

The nationwide core CPI fell 1.0% y/y in December for the fifth straight month after -0.9% in November. This posted the biggest fall since September 2010 when the index fell 1.1%.

BOJ officials judged that the core inflation rate remain solid, compared with a big negative output gap and weak economy, as corporate retail price cuts have not been expanded.

PROCESSED FOODS WORRY

BOJ officials are particularly worried about weak prices for processed foods, accounting for 15% of the total CPI on which BOJ officials focus,

These prices are sensitive to the economic climate and fell 0.2% in December following a 0.2% fall in November.

WEAKER CORE-CORE CPI

December core-core CPI, excluding fresh food and energy items - the BOJ's preferred gauge of the underlying trend - fell 0.4% y/y in December after falling 0.3% in November.

The drop in inflation was mainly due to the decline in energy items and accommodation costs caused by the government's "Go To Travel" campaign, with government subsidies lowering overall costs at hotels.

The BOJ sees the travel cost impact as temporary but they still expect the key inflation rates to be negative for a while, weighed down by Covid-19 and the recent fall in oil prices which will continue to lower utility costs due to a time lag.

Overall accommodation prices fell 33.5% y/y in December, narrowing from a 34.4% fall in November.

Service prices fell 1.0% y/y in December after falling 1.0% in November. Prices for eating out, another key BOJ focus, slowed to +0.3% y/y in December from +0.4% in November.