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MNI POLICY: Tokyo July Core CPI Up, But Stuck Below BOJ Target

BOJ Sees Momentum To Target Lost, Focus On Real Economy Lending

(MNI) LONDON
TOKYO (MNI)

Tokyo core inflation rose for a third straight month in July, boosted by higher services prices, although it still sits far below the Bank of Japan's 2% price target and bank officials accept momentum towards its goal, a key policy objective, has been lost.

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 rose 0.4% y/y in July and points to a higher nationwide inflation rate with the core number likely to pick up from June's 0.0%, although the BOJ has recently warned inflation will likely be negative for the time being due to the impact of Covid-19, before picking up as the economy recovers.

Core-core CPI, which excludes fresh foods and energy and is the BOJ's key inflation indicator, rose 0.6% in July, accelerating from +0.4% in June. Prices for energy items fell 3.2% y/y in July, improving -3.5% in June, as its negative contribution on the overall number narrowed to -0.17 percentage points in July from -0.19 pp.

Service prices rose 0.9% in June, accelerating from a 0.3% rise in June, while price for eating and drinking rose 2.8%, slowing slightly from June's 2.9% 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 behavior 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 of the yen, 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.

MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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