MNI POLICY: Tokyo Jan Core CPI Drop Slows on Accommodations

Tokyo core inflation rate fell for the sixth straight month in January but the drop slowed in the wake of a smaller fall in accommodation prices as the government temporarily suspended the Go To Travel campaign.

Core inflation in the capital fell 0.4% y/y in January and points to a higher nationwide inflation rate with the core number likely to drop from December's -1.0%, with data due out on Feb. 19.

Prices for accommodations fell 2.1% y/y in January, sharply narrowing from a 33.5% fall in December. The negative contribution narrowed to 0.53 percentage points from 0.55 pp previously.

The January data was within the Bank of Japan's forecast that the inflation rate is expected to be negative for the current period, affected by the Covid-19, the past drop in crude oil prices and the Go to Travel campaign.

January's smaller drop was consistent with the forecast by bank officials who expected the drop in inflation rate to hit bottom in the first quarter.

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 cuts have not been expanded.

However, they continue to pay attention to how a prolonged weak inflation rate will lower medium to long-term inflation expectations and growth expectations, and cause corporate retail price cut.

CORE-CORE CPI RISES

Core-core CPI, which excludes fresh foods and energy and is the BOJ's key inflation indicator, rose 0.2% y/y in January, for the first rise after 0.6% in July 2020.

Service prices rose 0.1% in January, reversing from a 0.9% fall in December, but prices for eating and drinking rose only 0.1%, unchanged from December.

Prices for energy items fell 10.9% y/y in January, widening from -10.2% in December, as its negative contribution on the overall number widened to 0.58 percentage points from -0.53 pp.