BOJ State of Play: To Cut CPI Forecast Sub 1%; Eye on Dissent

By Max Sato

     TOKYO (MNI) - The Bank of Japan board is fully expected to maintain its

monetary policy targets at its two-day meeting ending Tuesday, as it has since

changing the policy framework in September last year, but the market will focus

on how far it cuts its core CPI forecast and whether dissent to the no-change

policy decision will result in a specific proposal to increase monetary

stimulus.

     The board is likely to the maintain its policy targets of guiding the

overnight interest rate at -0.1% and the 10-year bond yield around zero percent.

But the board is again likely to be divided after the 8-to-1 decision in

September.

     Board member Goushi Kataoka, who dissented last month, is expected to do so

again this month.

     Last month, Kataoka, who just joined the board in July, argued that the

current scale of already large monetary easing was insufficient to meet the

central bank's 2% policy goal by the current target date of "sometime in fiscal

2019."

     He didn't make any counterproposal then, so the focus will be on whether he

will make a specific proposal for more easing this time, and whether any other

board members will join his dissent, although this is seen as unlikely.

     In its quarterly Outlook Report, to be released after the meeting, the

board is expected to acknowledge that the economy is continuing to grow at a

modest pace, backed by solid exports and factory output as well as resilient

consumer spending, while admitting that price pressures are weaker than

expected.

     The board's median forecast for the core CPI (excluding fresh food prices)

in the current fiscal year is expected to be revised down from the 1.1%

projected in July to below 1.0%.

     It is unclear how far below 1% the board will set its new median forecast.

The lower the forecast, the greater the pressure it will put on the board to

start considering a further delay in the expected date for meeting its 2%

inflation target, currently set at "sometime in fiscal 2019." Another delay

would be the seventh since the BOJ adopted the 2% target and began large-scale

easing in 2013.

     A sharp revision of the core CPI forecast below 1% for this fiscal year

would also reinvigorate market debate on whether the BOJ's 2% inflation goal is

realistic, particularly given the near-term inflation outlook.

     Japanese consumer inflation has stagnated below 1% due in part to discount

sales at supermarket chains and the lingering effect of competition between

mobile telephone carriers. The slow inflation pace will continue into next year

as support from higher energy prices fades in the year-on-year calculations.

     Core CPI, which excludes volatile fresh food prices, rose 0.7% on year in

September, with the pace of increase unchanged from that in August, data

released Friday show. The September result was weaker than the MNI median

forecast of +0.8%.

     Energy prices rose 7.6% on year in September after rising 7.0% in August,

while prices for processed food including alcoholic beverages gained 1.0% after

a 0.9% increase the previous month. Partly offsetting these increases, mobile

communications fees fell 5.4% in September, the same pace of decline as in

August, indicating their negative contribution may be peaking.

     Going forward, the base effect of higher energy prices will fade and keep

the CPI rise under 1% next year.

     "If gasoline prices stay around the current levels, their positive

contribution to total CPI will peak out in November or December," said an

official at the Ministry of Internal Affairs and Communications that compiles

CPI data.

     "The base-year effect of the April hike in electricity charges will

continue until next spring, but given the high weighting of gasoline prices the

pace of increase in consumer prices is likely to be slow."

     The support energy prices give to headline CPI is significant, as shown by

the fact that core-core CPI, which excludes fresh food and energy, rose just

0.2% on year in September, a rate unchanged from August.

     The average economist forecast for core CPI is only 0.62% for fiscal 2017

ending in March 2018 and just 0.82% for fiscal 2018, according to the latest

monthly ESP Forecast Survey of 41 economists by the Japan Center for Economic

Research.

     At around 1200 JST (0300 GMT) Tuesday, the BOJ will release the outcome of

the two-day policy meeting and the quarterly Outlook Report in which it updates

the board's projections for GDP and CPI through fiscal 2019 with its medium-term

risk analysis.

     The previous policy meeting on Sept. 20-21 ended at 12:08 JST (0308 GMT),

and the last meeting with the release of the Outlook Report on July 19-20

finished at 12:03 JST (0303 GMT).

     Later at 1530 JST (0630 GMT), BOJ Governor Haruhiko Kuroda will hold a news

conference to discuss the board's decision and outlook.

     After the last policy meeting on Sept. 20-21, Kuroda told reporters that

the central bank won't let a rise in U.S. interest rates lead to a premature

rise in domestic borrowing costs as there is still a long way to go to reach the

bank's 2% inflation target.

     The governor explained the slow progress in achieving stable 2% inflation

by pointing to the stubborn deflationary mindset among businesses and households

as well as consumers' reluctance to accept higher prices when wage growth

remains low.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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