By Max Sato
(MaceNews) – Japanese consumer prices posted a sharper drop in October as energy costs were slow to recover amid the global pandemic and the government campaign to save the hard-hit tourism industry by subsidizing hefty discounts had a wider impact, data from the Ministry of Internal Affairs and Communication released Friday showed.
The weak price data alone is unlikely to prompt the Bank of Japan to consider adding more monetary stimulus, as exports, factory output and consumer spending have somewhat picked up from the COVID-19 slump. The government may draft more fiscal stimulus measures to cope with business bankruptcies and job cuts, but some believe it has sufficient funding from earlier supplementary budgets for fiscal 2020.
The key points:
* The national average core consumer price index (excluding fresh food) fell 0.7% from a year earlier in October, as expected, after dipping 0.3% in September. It was the third straight year-on-year decline, and the fifth this year.
* More people took advantage of government-sponsored discounts on accommodations and transportation aimed at helping the tourism industry fight the coronavirus-caused slowdown. Critics said the program may be partly responsible for triggering a renewed spike in coronavirus cases in some cities, which in turn could slow down economic activity.
* The downward pressure on CPI overwhelmed higher prices in some categories. The base-year effects of government subsidies to provide free education of preschoolers since October last year have faded, prompting prices for privately owned kindergartens to soar 20.8% y/y, but its impact on the overall CPI was neutral. In September, those prices plunged 94.0%, pushing down the total CPI by 0.25 point. Mobile communications fees stayed above year-earlier levels while domestic tobacco prices also rose.
* The underlying inflation rate – measured by the core-core CPI (excluding fresh food and energy) – fell 0.2% in October after being unchanged in September and falling 0.1% in August, which was the first fall in more than three years. The consensus forecast was -0.3%.
* Total CPI dipped 0.4% on year in October after being flat in September and rising 0.2% in August, marking the first y/y decrease in just over four years since September 2016 (-0.5%). At that time, food companies and restaurant chains were cautious about raising prices amid uncertain global and domestic growth prospects.
* In the total CPI measure, energy costs fell 5.7% y/y in October (-3.5% in September), pushing down the indicator by 0.44 percentage point (0.27 point the previous month), while prices for food excluding perishables – another key item in the CPI basket of goods and services – gained just 0.2% y/y with a positive 0.05 percentage-point contribution, slowing from +0.8% and +0.18 percentage point in September.
* Accommodations prices continued to plunge in October, down 37.1% and pushing down the total CPI by 0.45 percentage point. Their downward pressure intensified from September, when the prices fell 30.0% and trimmed the total reading by 0.35 point. Household durable goods prices rose 0.8% with a slightly positive 0.01 percentage-point contribution (vs. +2.4%, +0.03 point in September).
BOJ policy stance unchanged for now
There is nothing much the Bank of Japan can do to guide inflation expectations among households and businesses higher toward its 2% price target amid high uncertainties caused by COVID-19. The central bank is expected to maintain, for now, its policy stance of providing support to financial markets by keeping the long-term interest rate at around zero percent and the overnight borrowing rate at -0.1%.
The base-year effects of the sale tax hike to the current 10% from 8% in October 2019 have waned, which is putting a statistical damper on already muted price increases. Some households appear to be saving money, instead of spending, in the face of dim prospects for year-end bonuses and seniority-based wage hikes in April at the start of fiscal 2021, which means companies will be reluctant to raise retail prices for fear of losing customers.
In its latest quarterly Outlook Report issued on Oct. 29, the Bank of Japan’s board repeated its recent assessment that risks to both growth and inflation were “skewed to the downside” and its outlook remained “extremely unclear” amid the lingering impact of the global pandemic.
The median forecast for the core CPI (excluding perishables) by the nine-member board was revised down slightly to -0.6% for fiscal 2020 from -0.5% projected in July. Excluding the direct impact of the sales tax hike in October 2019 (+0.5 percentage point) and free education subsidies by the government (-0.4 percentage point), the core CPI reading is projected to fall 0.7% in the current fiscal year, revised down from -0.6% forecast in July.
The median inflation forecast for fiscal 2021 was revised up slightly to +0.4% from +0.3% made in July and the forecast for fiscal 2022 was unchanged at +0.7%.
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Contact this reporter: max7sato@gmail,com.
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