May 23, 2019 / 11:56 PM / 2 months ago

Japan's key inflation gauge hits 3-year high, offers little respite for BOJ

TOKYO (Reuters) - An inflation gauge closely watched by the Bank of Japan accelerated at its fastest pace in almost three years as some retailers passed on rising costs to households, a positive sign for the central bank as it seeks to stoke consumer prices.

FILE PHOTO: A clerk arranges shoes at a shop in Tokyo, Japan, January 23, 2017. REUTERS/Kim Kyung-Hoon/File Photo

But the big part of the increase came from a spike in package tour fees ahead of Japan’s 10-day holiday in May, casting doubt over the long-term sustainability of the improvement as escalating trade tensions weigh on the outlook for the export-reliant economy.

Core consumer prices rose 0.9% in April from a year earlier, matching a median market forecast and accelerating slightly from the previous month’s 0.8% gain, government data showed on Friday.

The so-called core-core CPI, which strips away the effects of volatile food and energy costs and is the main policy focus for the BOJ, rose 0.6% in April, marking the biggest increase since June 2016, the data showed.

“Some companies appear to have translated rising costs to households. But wage growth is slow and consumers remain sensitive to price hikes, so it’s doubtful whether such a move will broaden,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“There’s not much the BOJ could do to fire up inflation, so it will probably maintain its current ultra-easy policy for some time,” he said. Minami predicted that core consumer inflation will slow to around zero-0.5% in the second half of the current fiscal year ending in March 2020.

Japanese companies typically revise prices of their goods and services at the April start of a new fiscal year. Prices rose for nearly 57 percent of items making up the core CPI index in April, up from 54 percent in March.

Product classes that saw prices rise include processed food, television sets and air conditioners. Package tour fees for overseas travel jumped 15 percent, helping push up core-core inflation, the data showed.

The BOJ hopes that continued strength in the economy will prompt companies to raise wages and give consumers more purchasing power, thereby helping accelerate inflation.

The outlook, however, is murky.

Japan’s economy grew at an annualised 2.1% in the first quarter, defying forecasts for a contraction due to net contributions from exports.

But the expansion was overshadowed by weaknesses in capital expenditure and private consumption, casting doubt over the BOJ’s argument that robust domestic demand will moderate the pain from slowing global demand.

Years of heavy money printing have failed to drive up inflation to the BOJ’s elusive 2% target, forcing the central bank to sustain a massive stimulus despite the damage ultra-low interest rates is inflicting on financial institutions’ profits.

Reporting by Leika Kihara; Editing by Sam Holmes

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