— See Separate Table For Details of Individual Forecasts

TOKYO (MNI) – Japan’s national core consumer price index is
estimated to have fallen only 0.5% year-on-year in October, with the
pace of y/y decline decelerating from the 1.1% drop in September due
largely to the tobacco tax hike that took effect Oct. 1, according to
the median forecast of analysts surveyed by Market News International.

The fall in the October core CPI (excluding fresh food but
including energy) is expected to be the smallest since -0.1% in April
2009.

The Ministry of Internal Affairs and Communications will release
the data on Friday, Nov. 26.

The core CPI fell 1.1% in September, the 19th straight y/y drop, as
Japan’s negative output gap — excess capacity vs. slack demand —
continues to depress prices.

Technological advancement is making higher quality computers and
TVs available at the same or lower prices while intense competition
among retailers is hampering price increases for many goods and services
ranging from fast food and clothing to mobile communications.

In addition, the government’s subsidy for high school tuition will
continue to keep a lid on CPI for the 12 months since the program was
launched in April this year.

High school tuition fell 17.4% on year in September, pushing down
the overall September CPI by 0.49 percentage point.

In contrast, prices of refined petroleum products (gasoline and
heating oil) and utilities are expected to continue providing some
support to core CPI but not as much as in previous months. Overall
energy costs in September rose 3.7% y/y, down from +4.3% in August.

Oil Information Center data showed that the pace of growth in the
average regular gasoline price slowed to +2.3% y/y in October from +3.1%
in September.

“The drop in the October national core CPI is expected to have
shrunk significantly due to the tobacco tax hike and increases in
property and casualty insurance premiums,” said Azusa Kato, economist at
BNP Paribas.

The tax hike raised cigarette prices 38.6% on year in Tokyo in
October, pushing up total Tokyo CPI by 0.2 percentage point last month.

Takehiro Sato, chief economist at Morgan Stanley MUFG, said that
the tobacco tax hike will have a stronger impact on national CPI than on
Tokyo CPI because the weighting for cigarettes is 63 within the total
core national CPI weighting of 9,588 (the overall 10,000 weighting minus
the fresh food component), higher than the 48 against 9,600 in core
Tokyo CPI.

Tokyo core CPI for November, which will be released together with
October national figures, is also expected to show a 0.5% fall on year,
matching its October decline.

Looking ahead, Yoshiki Shinke, senior economist at Dai-Ichi Life
Research, forecast that “downward pressures on prices will not fade
easily, as the economic slowdown will become clearer and the improvement
of demand will pause.”

Economists expect the y/y change in core CPI to return to positive
territory in fiscal 2012 with a 0.19% gain over fiscal 2011, after
posting three straight years of price drops, according to the latest
monthly survey by the Cabinet Office’s Economic Planning Association.

The average economist forecast for the core CPI for fiscal 2011
ending on March 31, 2012 was -0.20%, according to the association
survey.

These figures are weaker than the latest median projections by the
Bank of Japan policy board for +0.6% for fiscal 2012 and +0.1% for
fiscal 2011, partly because BOJ policymakers tend to include greater
effects from enhanced monetary easing than do private-sector economists.

skodama@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4838 **

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