August headline inflation rose 1.3%y/y, while core inflation that excludes fresh food prices inched up slightly to 0.9%y/y with the prices of both fresh food & energy excluded up 0.4% y/y. Despite the slight increase in headline inflation, it is still below the central bank’s 2% inflation target , which suggests the challenge the BOJ faces in overcoming the entrenched deflationary.

We believe the stubbornly soft inflation could delay the BOJ's exit from ultra-loose policy depite the premier recently citing that he is now more relaxed about the need for BOJ to meet its price goal. We concur with BOJ that they will not pull the plug on monetary easing until inflation hits its elusive target. Subdued wage and price growth is expected to see BOJ maintain its massive stimulus despite some side effects, notably the hit to bank profits from prolonged near-zero interest rates.

• Headline inflation rose 1.3%y/y in August from 0.9% y/y in July. Meanwhile, the core inflation which excludes prices of fresh food inched up slightly to 0.9%y/y in August from 0.8%y/y in July. With both fresh food & energy excluded, the prices edged higher to 0.4% y/y in August from 0.3% y/y in July.

• Despite the slight increase in headline inflation, it is still below the central bank’s inflation target of 2%.The data underlines the challenge the Bank of Japan (BOJ) faces in overcoming the entrenched deflationary mindset that has discouraged firms from raising prices for fear of scaring away cost-sensitive consumers.

• We believe the stubbornly soft inflation could delay the BOJ's exit from ultra-loose policy depite the premier recently citing that he is now more relaxed about the need for BOJ to meet its price goal. We concur with BOJ that they will not pull the plug on monetary easing until inflation hits its elusive target. Subdued wage and price growth is expected to see BOJ maintain its massive stimulus despite some side effects, notably the hit to bank profits from prolonged nearzero interest rates.

Source: AmInvest Research - 24 Sept 2018