— Energy, Subsidized Tuitions Remain Key Factor Behind Weak Core Prices
By Max Sato
(MaceNews) – The deflationary trend in Japanese consumer prices eased further in February in light of firmer food and energy costs, data from the Ministry of Internal Affairs and Communication released Friday showed, but consumption, the key growth driver, is forecast to slump this quarter due to the government’s call for restricted economic activity during the pandemic.
Most of the key CPI measures were still below year-earlier levels, mainly due to lower utilities charges and gasoline prices as well as government-subsidized tuitions. However, the recent uptrend in the oil markets is expected to continue easing the downward pressure from the energy category in coming months.
As the drag from the pandemic lingers, the Bank of Japan’s task to guide inflation toward its 2% target remains challenging.
The bank is to announce the results of its review of monetary easing tools later Friday, when it releases its policy decision after a two-day board meeting. At stake is how to make massive purchases of government debt and exchange traded funds more flexible without upsetting the markets, and to explore the expansion of negative interest rates without further eroding lender profit margins.
The key points from CPI data:
* The national average core consumer price index (excluding fresh food) fell 0.4% from a year earlier in February, as expected, after slipping 0.6% in January and slumping 1.0% in December. The slight easing in the pace of drop was mainly due to smaller y/y drops in gasoline, heating oil and utility costs, but energy and subsidized university tuitions remained the key force behind weak consumer prices.
* It was the seventh straight year-on-year decline in the core CPI, and the ninth in the past 12 months.
* The underlying inflation rate — measured by the core-core CPI (excluding fresh food and energy) – rose 0.2% on year in February for the second straight y/y gain after rising 0.1% in January and falling 0.4% in December.
* Total CPI dipped 0.4% on year in February after slipping 0.6% in January and plunging 1.2% in December. Fresh food prices were unchanged on year after pushing down the total index by 0.01 percentage point the previous month.
* Among key components of the CPI basket of goods and services: Energy -7.2% y/y (-0.57 percentage point contribution) in February vs. -8.6% (-0.68 point) in January; food excluding perishables unchanged y/y (-0.01 point) vs. -0.1% (-0.02 point).
* Household durable goods prices remained on an uptrend, up 3.1% on year (+0.03 point contribution) vs. +3.1% (+0.03 point) the previous month. Stay-home COVID lifestyles has pushed up demand for electric appliances and furniture.
* Accommodations -5.1% y/y (-0.06 point contribution) in February vs. -2.1% (-0.02 point) in January and -33.5% (-0.40 point) in December. Hotels were forced to cut prices amid sluggish demand in February as people generally refrained from traveling outside of their areas. From December to January, the downward pressure from accommodations eased sharpy after the government suspended its controversial program to support the tourism industry with subsidized hefty discounts on domestic travel.
* In contrast, overseas tour prices showed a smaller drop in February, down 0.8% on year and being neutral to the overall index, compared with -5.3% (-0.03 point contribution) in January.
In February, the government extended its emergency measures by one month until early March for Tokyo and nine other jurisdictions, urging bars and restaurants to close by 8 p.m., and asking people to stay home as much as possible and limit shopping to essential items. Companies have been told to help reduce the use of public transportation by allowing most of their employees to work from home.
Later, the government lifted the restrictions on six prefectures at the end of February. This week, it has also decided to end the state of emergency on Tokyo and three surrounding prefectures on March 21, citing lower COVID-19 hospital occupancy levels.
However, there is uncertainty as to how the government can contain the spread of the pandemic. Some bars and restaurants have been defying the government call and staying open until later hours, and some entertainment districts are packed with visitors.