MNI POLICY: Japan May CPI Rise Slows; BOJ Sees Gradual Rise

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan still sees inflation rising towards its 2%

target despite the deceleration in May, although no swift pick-up in pace is

seen in coming months.

     Nationwide core consumer prices slowed in May, in line with BOJ

expectations after data earlier this month showed slowing Tokyo core CPI. The

underlying trend remains solid but MNI understands Bank officials are perplexed

by the slow speed of price rises despite the continued positive output gap and

are increasingly cautious over the outlook.

     --SLOWER MAY CPI

     Core prices rose 0.8% for a 29th straight rise in May, slowing from April's

0.9%. Tokyo core CPI rose 1.1% on year in May, after rising 1.3% last month.

     Many restaurants and processed food companies have raised retail prices,

but the BOJ sees the impact on official CPI data as limited.

     Goods prices excluding volatile fresh food prices rose 1.2% on year in May,

after April's 1.4% gain, although the overall contribution to CPI rose to 0.22pp

from 0.20pp in April. Overall goods prices rose 1.1% in May, slowing from 1.2%

previously.

     Prices for processed food, which accounts for 15% of the total CPI that BOJ

officials focus on, rose 0.9% on year in May, up from 0.8% in April, perhaps one

indication that corporate price hikes may be gaining a little traction.

     One note of caution came from service prices, which rose 0.2% on year in

May, decelerating from 0.4% in April, although prices for eating out rose 1.1%

on year in May, unchanged from both April and March, suggesting upward pressure

on eating out continued but without gaining momentum.

     The BOJ will get their next look at the inflation picture on June 28 when

this month's Tokyo core CPI data is published.

--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

[TOPICS: MMJBJI,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]