MNI POLICY: Weaker Index Raises BOJ Concerns About Price

Bank of Japan officials are alert to the possibility of weaker prices after the diffusion index plunged in December but they don't view the underlying price trend as having changed as prices remain solid compared with the big negative output gap, MNI understands.

Bank officials are of the view that increasing corporate price cuts and sales to lift demand weighed on the index in December. The diffusion index, which is the proportion of items increasing in price to those decreasing, stood at 4.4% in the month, the second-lowest level since the bank introduced quantitative and qualitative easing in April 2013. The lowest was in May 2013. The index was at 11.1% in November last year and at 18.4% in October.

PROCESSED FOOD PRICES

Although prices remain solid, officials are paying particular attention to the weakness in the processed food category, which accounts for 15% of total CPI and is sensitive to economic trends that BOJ officials are focused on.

Processed food prices fell 0.2% y/y in December, unchanged from -0.2% in November but down from 0.0% in October, +0.1% in September and +0.3% in August.