Tokyo Inflation Slows More Than Expected Before BOJ Price Review

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Inflation in Tokyo slowed in September to less than half its pace five months ago as the Bank of Japan prepares for an assessment of whether the global slowdown risks killing off price growth in Japan.

Consumer prices excluding fresh food in Tokyo, a leading indicator of nationwide inflation figures, rose 0.5% from a year earlier, the slowest pace in 16 months, according to the ministry of internal affairs Friday. The number was worse than a median estimate of 0.6% among economists. A sharper drop in gasoline prices and slower gains in household electricity costs weighed on the index.

Key Insights

• The 0.2 percentage point slowdown in Tokyo prices suggests nationwide inflation data due next month are also likely to show further weakness ahead of a BOJ meeting that will focus on whether Japanese prices are losing impetus.
• BOJ Governor Haruhiko Kuroda has pledged to loosen policy without hesitation if price momentum is at greater risk. His call for a review of the economy and prices at the central bank’s Oct. 30-31 meeting has fueled speculation that the BOJ will ramp up stimulus measures.
• The slowdown in Tokyo inflation also comes ahead of a hike in the consumption tax next week that may weaken household spending over the coming months, further eroding inflationary pressure. Economists are expecting the economy to contract following the tax increase.
• “I expect many companies are going to cut prices after the tax hike to maintain sales levels,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities, who accurately predicted Friday’s figure. That will also put downward pressure on prices, he added.
• Cheaper overseas vacation packages also contributed to the fall in price levels, a factor that could be a seasonal blip.
• BOJ board member Takako Masai this week said price momentum was showing signs that it could get stronger again, providing a reason for the BOJ to sit tight.

What Bloomberg’s Economist Says

“Looking ahead, we expect core inflation (excluding fresh food) to slow to 0.3% toward year-end. The main drags are policy-related factors -- lower mobile phone service charges and reduced education costs.”

Yuki Masujima, economist

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• Tokyo inflation excluding fresh food and energy rose 0.6% matching analysts’ forecast, an indication that underlying inflation may not be weakening as much as the more closely watched core figure.
• Overall Tokyo inflation climbed 0.4%, weaker than economists’ prediction of 0.5%.

--With assistance from Tomoko Sato.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Emi Urabe in Tokyo at eurabe@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jason Clenfield, Paul Jackson

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