MNI POLICY: Tokyo Aug Core CPI Down; Core-Core Turns Negative

Tokyo core inflation fell for the first time in four months in August, weighed by weaker prices across the accommodations and services sectors as self-imposed social distancing by consumers weighed.

Lower household durable goods prices also pressured the August inflation rate lower, although prices for eating-out and goods remained solid.

Prices for accommodations fell 32.0% y/y in August, worsening sharply from the 4.5% fall in July. Its negative contribution widened to 0.56 percentage point from 0.07 pp previously.

Despite the August summer holidays, many refraining from traveling amid growing concerns over the spreading coronavirus.

At present though, the BOJ will look through the lower inflation as it focuses on providing liquidity to the banking system to ensure lending gets to the real economy and the financial system remains stable.

Core inflation in the capital fell 0.3% y/y in August and points to a lower nationwide inflation rate with the core number likely to pick up from July's 0.0%, although the BOJ recently warned the pandemic will likely keep inflation negative for the time being, before picking up as the economy recovers.

--CORE-CORE CPI DROPS

Core-core CPI, which excludes fresh foods and energy and is the BOJ's key inflation indicator, fell 0.1% in August, the first drop in almost 3 years following a 0.6% gain in July. Prices for energy items fell 2.9% y/y in August, improving from -3.2% in July, as its negative contribution on the overall number narrowed to 0.15 percentage points from -0.17 pp.

Service prices fell 0.4% in August, reversing a 0.9% rise in July, while prices for eating and drinking rose 2.8%, unchanged from July's 2.8% gain, with many firms appearing to leave prices unchanged, despite lower demand.

The BOJ has seen firms reduce prices to stimulate demand during past deflationary periods, although such behaviour has not been widely observed in the current downturn.

This time around, it sees a few factors holding firms back, pointing in part to the lack of a sudden yen appreciation, despite the sharp decline in overseas economies, with no following downward pressure on prices of durable goods and food exports, which are sensitive to developments in the forex rates.