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SP500 PE Ratio vs. CPI Inflation

MNI POLICY: Tokyo Dec Core CPI Down on Energy, Accommodation

--Tokyo Dec Core CPI Falls 0.9%; Biggest Fall Since -1.0% in Sep 2010

TOKYO (MNI)

Tokyo Core Inflation Rate fell for the fifth straight month in December, weighed by weak prices in the accommodation and energy sectors as well as services, including dining and drinking services.

December data were consistent with the view held by Bank of Japan officials who expected Japan's inflation rate to be in the negative territory for the time being due to the past drop in crude oil prices and the government's "Go Travel" campaign.

Bank officials maintained the view that the core CPI excluding the special factors remained firm, compared with a big negative output gap (-4.83 percentage points in Q2), as retail price cut hasn't expanded.

They expect the drop in consumer prices to hit bottom in or after the first quarter of 2021.

They also continue to pay attention to how weaker inflation will lower medium-to-long-term inflation expectations and growth expectations, and cause corporate retail price cuts.

Core inflation in the capital fell 0.9% y/y in December and pointed to a lower nationwide inflation rate with the core number likely to drop from November's -0.9% due out on Jan. 22.

December's -0.9% was the biggest drop since September 2010's -1.0% y/y.

--WEAKER CORE-CORE CPI

Core-core CPI, which excludes fresh foods and energy as the BOJ's key inflation indicator, also fell 0.4% y/y in December, down from -0.2% in November.

Prices for accommodations fell 33.5% y/y in December, slightly narrowing from a 34.4% fall in November. Its negative contribution narrowed to 0.53 pp from 0.55 pp previously.

Service prices fell 0.9% in December, unchanged from a 0.9% fall in November, but prices for eating and drinking rose only 0.1%, slowing from +0.2% in November, indicating in-person services continued to be hit by the pandemic.

Prices for energy items fell 10.2% y/y in December, widening from -8.9% in November, as its negative contribution on the overall number widened to 0.53 percentage points from -0.47 pp.

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.

However, bank officials are paying attention to how the government's decision of partly suspending the Go Travel subsidies and the Tokyo decision of requesting restaurants serving alcohol to shorten their operating hours on prices and inflation expectations.