MNI POLICY: Japan Sep CPI Drops 0.3%; 2nd Straight Fall

A weak September core consumer price index was no great surprise to Bank of Japan officials who expected the inflation rate to stay in negative territory for the time being, MNI understands.

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

The nationwide core CPI fell 0.3% y/y in September for the second straight decline following -0.4% in August.

Despite the continued weak core inflation, 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.

The BOJ has noted that the momentum for the price stability target has been temporarily lost.

--CORE-CORE CPI FLAT

September core-core CPI excluding fresh food and energy items, the BOJ's preferred gauge of the underlying trend, was unchanged from a year earlier, following a 0.1% fall in August, and is at its lowest point since March 2017.

The fall in inflation was due mainly to the declines 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 key inflation rates to be negative for a while, weighed down by the Covid-19 disruptions and the recent drop in oil prices, which will lower utility costs after a time lag.

Overall accommodation prices fell 30.0% y/y in September, slightly easing from a 32.0% fall in August. The negative contribution from accommodations narrowed to 0.35 percentage point from -0.42 pp in August.

--STEADY SERVICE, EATING OUT

Service prices were unchanged from a year earlier in September, improving from a 0.1% fall in August. The contribution turned to +0.01 pp in September from -0.05 pp in August.

Prices for eating out, another key BOJ focus, remained firm, up 2.8% y/y in September after rising 2.9% in August.

BOJ officials noted the rise in service prices despite the sector being the hardest hit by the coronavirus pandemic.

The bank believes that firms which might cut prices to stimulate demand during previous deflationary periods have not yet acted.