Consumer inflation rose at a slower pace in March by 1.1% y/y, while core inflation (excluding prices of fresh food) climbed 0.9% y/y in March, the same pace as in February suggesting no change to the underlying trend on inflation. Even if oil prices are stable, the recent rise in the yen should start showing an impact from May or June, and the rise in food prices should slow. Though upward pressure from the positive output gap and wage growth should lift core inflation above 1% in 3Q2018, a strong yen can slow down the process. We project headline inflation to average around 1.0% in 2018 and 1.5% in 2109, implying no change to the current monetary policy. But we will be watching closely on the BoJ’s tone on the macro data and monetary stance.

• Consumer inflation rose at a slower pace in March by 1.1% y/y from 1.5% y/y in February, bringing the average 1Q2018 to 1.3% y/y which is higher than 1Q2017 average of 0.3% y/y but still below the Bank of Japan’s (BoJ) target of 2%. Meanwhile, core inflation (excluding prices of fresh food) climbed 0.9% y/y in March, the same pace as in February.

• We feel the underlying trend on inflation has not changed much. The reason being, inflation excluding fresh food and energy remained the same. Even if oil prices are stable, the recent rise in the yen should start showing an impact from May or June, and the rise in food prices should slow.

• But the upward pressure from the positive output gap and pickup in wage growth could result in a more moderate increase. This, together with stable oil prices, could possibly see the core inflation exceed 1% in 3Q2018. The challenge will arise should the yen stay strong and slow down the producer price thus reducing costs and transfer price to consumers.

• We project headline inflation to average around 1.0% in 2018 and improve to 1.5% in 2109. Hence, we are not expecting any change to the current monetary policy instituted by the Bank of Japan (BoJ). Nonetheless, we will be watching closely the tone of BoJ with regards to its potential outlook on the key macro data and monetary stance.

Source: AmInvest Research - 23 Apr 2018