April 25, 2014 / 12:25 AM / 5 years ago

UPDATE 2 -Tokyo inflation hits 22-yr high, inching toward BOJ goal

* Tokyo core CPI up 2.7 pct in April yr/yr, hits 22-yr high
    * Nationwide core CPI up 1.3 pct yr/yr, matches 5-yr high
    * Tokyo core CPI up 1.0 pct when excluding tax hike impact
    * Wage rises key in sustaining economic recovery

 (Adds more analyst's quote, details, background)
    By Tetsushi Kajimoto and Leika Kihara
    TOKYO, April 25 (Reuters) - Tokyo's inflation jumped to a
22-year high in April by a key measure, an early sign that
companies are making progress in passing on a new tax increase
to customers as policy makers seek to pull Japan out of years of
deflation.
    Friday's data for the capital, a leading indicator of
national trends showed much tamer inflation when the impact of
the sales-tax hike is excluded. This underscores the daunting
challenge for Prime Minister Shinzo Abe and the Bank of Japan in
generating a positive cycle of prices, wages and spending.
    Tokyo's core consumer prices rose 2.7 percent from a year
earlier, the interior ministry data showed in the first official
reading of the April 1 tax increase. Stripping out the tax hike,
prices were up 1.0 on year, the same pace as in March.
    The price increase bolsters the BOJ's view that the world's
third-biggest economy appears in the early days to be weathering
the rise in the sales tax to 8 percent from 5 percent. But given
the gradual pace of the pickup, expectations remain that the
central bank will have to do more.    
    "Higher consumer inflation will erode consumers' purchasing
power in the coming months as wages are unlikely to pick up as
much, putting a lid on consumption," said Naoki Iizuka, an
economist at Citigroup Global Markets Japan.
    "Today's data did not change our view that the BOJ will ease
policy again in June or July."
    For now, the BOJ can afford to wait on more data over the
next few months to assess the tax-hike hit to consumption and
growth, though it may not be able to quell doubts that inflation
is on a steady path towards its 2 percent price goal. 
    After years of sub-par growth, the Japan's economy sped past
its developed country peers in the first half of last year,
spurred by Abe's massive fiscal and monetary expansionary
policies.
    Growth has slowed since then as exports and consumption
lagged, prompting speculation that the BOJ will need to add to
last year's monetary stimulus to safeguard a fragile recovery.
    If inflation fails to pick up, it will cast doubt on the
central bank's argument that underlying increase in prices will
heighten inflation expectations, prompting companies to raise
wages and help sustain a domestic demand-driven recovery.
    The challenge for the BOJ was laid bare by nationwide core
consumer inflation data for March, also released on Friday,
which matched a five-year high of 1.3 percent but failed to pick
up pace for a third straight month.
           
 
      
    WAGE GROWTH KEY
    Markets expect the BOJ to hold off on easing at least until
around July, when there will be more evidence on how the tax
hike affected the economy, a recent Reuters poll showed.
    The CPI figures will be among data the BOJ will scrutinise
at its rate review next week, when it will update its long-term
projections underlining its conviction that consumer prices will
continue rising and hit 2 percent for two years from mid-2015.
 
    The BOJ has argued that the Japanese economy is making
steady progress toward achieving its 2 percent inflation target
by around mid-2015. Comments from BOJ officials in recent weeks
have sought to mollify concerns about the economic recovery
after a series of soft data suggested a loss of momentum.
    The central bank has also dismissed speculation it will be
forced to deliver additional stimulus soon, and Governor
Haruhiko Kuroda has repeatedly stressed that he saw no need to
ease policy for the time being.
    But the erosion of consumer spending power due to the sales
tax increase underscores the need for long-stagnant wages to
catch up with inflation to underpin consumption and help drive
the economic recovery.
     Friday's data showed that of the total items surveyed,
prices rose for 414 of them, nearly double the number in March,
but declined for 86 items, suggesting some firms remained
hesitant to translate the higher costs to consumers.
      The BOJ estimates that the sales tax rise will add 1.7
percentage points to Japan's annual consumer inflation in April
and 2.0 points from the following month. The government ministry
issuing CPI data does not crunch out such estimates.
    The central bank has stood pat since offering an intense
burst of monetary stimulus in April last year, pledging to
double base money via aggressive asset purchases to accelerate
consumer inflation to 2 percent in roughly two years.
    

 (Additional reporting by Kaori Kaneko; Editing by William
Mallard and Shri Navaratnam)
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