MNI POLICY: Tokyo Sept Core CPI Down; BOJ Eye On Lending

Tokyo core inflation fell for the second straight month in in September, weighed by weak prices across the accommodation sector, along with lower energy prices and goods prices.

The Bank of Japan will continue to look through 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.

Lower household durable goods prices also pressured the September inflation rate lower, although prices for eating-out and goods were little changed.

Accommodation prices, pressured lower by the government's 'go to travel' campaign, fell 30.0% y/y in September, improving modestly from the 32.0% fall in August. Its negative contribution narrowed to 0.46 percentage point from 0.56 pp previously.

Core inflation in the capital fell 0.2% y/y in September and points to a slightly higher nationwide inflation rate than August's -0.4%. 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, which excludes fresh foods and energy and is the BOJ's key inflation indicator, was unchanged from a year earlier in September following a 0.1% dip in August -- the first drop in almost 3 years.

Prices for energy items fell 3.3% y/y in September, widening from a 2.9% decline in August, as its negative contribution on the overall number widened to 0.17 percentage points from -0.15 pp.

SERVICES MIXED

Service prices fell 0.2% in September, narrowing from a 0.4% fall in August, while prices for eating and drinking rose 2.8%, unchanged from August'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.