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REPEAT: MNI ANALYSIS: BOJ Sees Underlying CPI Up But Cautious

Repeats Story Initially Transmitted at 06:34 GMT Mar 23/02:34 EST Mar 23
By Hiroshi Inoue
     TOKYO (MNI) - Japan's core inflation indicator excluding fresh food prices
picked up slightly to a 1% year-on-year rise in February, as expected, but Bank
of Japan officials remain cautious about the outlook as the latest gain was led
by hotels, overseas holiday tours and other volatile factors, MNI understands.
     The prices for household durable goods and processed food, which BOJ
officials believe are the key to a steady rise in consumer prices, have been
weak.
     BOJ officials think it takes time for retail price markups to be fully
reflected in CPI data as consumer prices are still slow to respond to the
sustained economic growth and the tightness of labor market conditions.
     But officials expect the momentum toward achieving the 2% inflation target
to increase in the coming months. They are monitoring the pace of wage and price
hikes in fiscal 2018 starting in April.
     --OVER 3-YEAR HIGH
     The national average core consumer price index (excluding fresh food) rose
1.0% on year in February, as expected, with the pace of increase accelerating
from 0.9% in January due to higher y/y gains in gasoline and heating oil prices.
     It was the fastest pace of increase since +1.0% in September 2014,
excluding the direct impact of the sales tax hike that year, but it is still
halfway toward the BOJ's 2% inflation target.
     The 14th straight year-on-year rise in February was also led by larger y/y
gains in accommodations, overseas holiday tours and mobile phones as well as
smaller y/y drops in mobile communications costs.
     As seen in the February Tokyo CPI data released earlier this month, Chinese
tourists rushed to Japan during the Lunar New Year holidays in February, pushing
up the prices for accommodations here, while strong Japanese demand for
traveling to South Korea for the PyeongChang Winter Olympics led to higher
prices for overseas tours.
     The core-core CPI (excluding fresh food and energy) rose 0.5% on year in
February after +0.4% in January, posting the highest gain since +0.5% in July
2016 but also showing it still takes time for the underlying inflation trend to
pick up.
     The pace of y/y increase in this narrow inflation indicator is expected to
rise above 1.0% in the coming months, BOJ officials believe.
     --SLOW GOODS PRICES
     The goods prices excluding volatile fresh food prices rose 1.8% on year in
February, with the pace of increase slightly faster than +1.7% in January. The
pace of increase in overall goods prices stayed high at +2.7% in February,
unchanged from January in light of continued high prices for fresh vegetables
and fish.
     The prices for processed food (canned food, bread, snacks, beverages,
etc.), which accounts for 15% of the total CPI, rose 1.1% on year in February
after +1.2% in January.
     --SERVICES UP SLOWLY
     The prices for services ranging from rents and restaurants to medicine and
communications rose 0.3% on year in February, up from +0.1% in January, partly
due to labor shortages.
     The prices for eating out rose 0.6% on year in February vs. +0.5% in
January, indicating the number of companies that are raising prices amid higher
raw material and labor costs is gradually growing.
     But the pace of y/y increase in service costs, the key to pushing up the
core CPI, remains slow as some companies are resisting price hikes amid tough
competition by investing in technology and curtailing business hours to cut
costs.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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