Sluggish rents get in way of inflation target

posted on November 6, 2015

In explaining the Bank of Japan's decision at the end of October to keep its monetary policy unchanged, Gov. Haruhiko Kuroda insisted that underlying price trends are improving steadily. Yet the central bank's latest "Outlook for Economic Activity and Prices" report casts a new shadow over its efforts to spur inflation.

The report, issued last Friday, looks at the period through fiscal 2017 -- which ends in March 2018 -- and details problems that could get in the way of the BOJ's 2% inflation target. This time around, the bank added a new risk factor -- rental and utility fees. "In the case of price rigidity of administered prices, some services prices, and rents for houses being more than expected, there is a possibility that the price rigidity will constrain the acceleration of CPI inflation," the report says, referring to the consumer price index.

Residential rents have been trending downward over the past decade. They have continued to post year-on-year declines since the BOJ implemented its quantitative and qualitative monetary easing program in April 2013.

This is weighing on the CPI, which is calculated on the assumption that "imputed rents" -- the rental value of owner-occupied dwellings -- are paid every month. These are imputed based on rents for actual rented dwellings.

Excluding volatile electricity and gas rates, growth in utility fees has also been sluggish.

The BOJ has said underlying price trends are determined by 1) the economy's overall supply-demand balance which shows employment and capacity utilization, and 2) inflationary expectations. However, the bank's report concludes that rental and utility fees are "less susceptible to economic developments" than other factors. Some BOJ officials expect rents to rise as wages increase, but there are no signs of an imminent change.

source by nikkei
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