MNI POLICY: Japan May CPI Unch at -0.2% On Lower Energy Price

By Hiroshi Inoue

     TOKYO (MNI) - Japan's core consumer price index fell 0.2% y/y in May,

unchanged from the 0.2% decline seen in April, as upward pressure from higher

service prices were offset by lower energy items.

     April's fall, following a 0.4% rise in March, was the first since December

2016 when it also fell 0.2% y/y.

     The BOJ expects Japan's inflation to remain weak for the time being on the

back of lower crude oil and goods prices amid the lingering concern over a

second wave of the coronavirus.

     The inflation rate forecast by the BOJ board members in this fiscal year is

a range of -0.3% to -0.7%.

     --CORE-CORE CPI RISES

     Core-core CPI, excluding fresh food and energy items, which BOJ officials

watch to gauge the underlying trend, rose 0.4% y/y, accelerating from +0.2% in

April, recording a 35th straight rise.

     The sluggish core CPI was due to weaker energy items (-6.7% y/y in May vs.

-4.7% in April) and weaker goods prices (+0.5% in May vs. +0.7% in April). The

negative contribution from energy item widened to -0.54 percentage point from

-0.37 pp in April.

     The positive contribution from goods prices excluding perishable foods fell

to +0.01 pp from +0.10 pp in April.

     --HIGHER PROCESSED FOODS, SERVICES

     Prices for processed foods, accounting for 15% of the total CPI on which

BOJ officials focus, rose 1.0% in May, accelerating from a 0.8% gain in April.

Service prices rose 0.5% y/y, also accelerating from 0.3% and prices for eating

out, another key BOJ focus, remained relatively firm, up 2.8% after a 2.9% rise

in April.

     --WEAKER PENT-UP DEMAND

     Looking ahead, the BOJ will watch how any pick up in the economy impacts

pent-up demand and what flow through there is into prices for eating out and

services, although there is still concerns over consumer confidence as the virus

lingers.

     There is still some concern at the BOJ that inflation expectations and

growth expectations in the weak service industry will drift lower, which in turn

will spread to other industries.

--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

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