MNI ANALYSIS: Japan Firms' Flat Outlook To Hamper CPI Pickup

--But BOJ Unlikely To Delay 2% CPI Timing Based Solely on Tankan

By Hiroshi Inoue

     TOKYO (MNI) - Japanese companies remain skeptical about the Bank of Japan's

latest, often-delayed timeframe of guiding low inflation to its 2% stability

target by around fiscal 2019, clouding the prospect for a steady pickup in

consumer prices.

     But the BOJ board is unlikely to delay the timeframe for achieving the 2%

inflation target at its next policy meeting on April 26-27, based solely on this

piece of information. Officials want to see whether more firms will raise retail

prices to reflect rising costs and hike wages amid labor shortages in fiscal

2018 that began on April 1.

     BOJ officials are fully aware that inflation expectations will not rise at

a fast pace in the face of the stubborn deflationary mindset among companies and

households. Prices are slow to respond to sustained economic growth and

tightening labor conditions.

     However, the officials were disappointed with Tuesday's data. The March

Tankan survey showed the inflation outlook among companies was unchanged from

December despite the recent slight pickup in consumer prices and a wider output

gap in positive territory.

     --FLAT EXPECTATIONS

     Firms on average expect the annual consumer inflation rate at 0.8% a year

from now, unchanged from December, when their forecast rose from +0.7% in

September. Companies also expect a 1.1% rise three and five years ahead, both

unchanged from December and September.

     This follows the main Tankan results released Monday that showed a mixed

bag of business conditions -- flat to weaker sentiment on rising costs and labor

shortages, solid capital investment plans and the slow progress in passing

higher costs onto consumers.

     In assessing the longer-term price trend, BOJ economists had expected the

inflation expectations for three to five years ahead to improve from three

months earlier as they believed the outlook would follow the recent rise in

prices.

     --MISSING LINK

     However, the combination of the sharp rise in the total CPI, which was

caused by a surge in vegetable prices, and the improving output gap (tighter

supply and firmer demand) haven't pushed up inflation expectations.

     The national average total consumer price index rose 1.5% on year in

February, accelerating from +0.6% in November, while the core CPI, which

excludes volatile fresh food prices, has been stagnant, up 1.0% on year in

February, compared with +0.9% in the previous three months.

     The BOJ estimates the output gap was 1.35 percentage points in

July-September, the fourth straight quarter of being in positive territory,

after +1.18% points in April-June.

     BOJ officials still believe that the momentum toward achieving the bank's

2% inflation target is maintained, patiently watching the impact of retail price

hikes and rising labor costs on consumer prices as well as inflation

expectations.

     The March Tankan showed that more companied saw raw material and labor

costs rise from three months earlier.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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

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