MNI: BOJ STATE OF PLAY: No Policy Shift Now, Focus on CPI

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan board will maintain the current pace of

monetary easing at its two-day policy meeting ending on Dec. 21 as it engages in

a prolonged battle to push up inflation, MNI understands.

     The economy has continued expanding moderately as the board predicted at

its last meeting on Oct. 30-31 and a moderate economic expansion is likely to

continue based on balanced domestic and overseas demand, BOJ officials believe.

     The market is already looking ahead to the BOJ's Jan. 22-23 meeting, when

the board will update its growth and inflation outlook in its quarterly Outlook

Report. This is the last report before BOJ Governor Haruhiko Kuroda's five-year

term ends on April 8. In addition, the five-year terms of two current deputy

governors end on March 19.

     After nearly five years of the BOJ's Quantitative and Qualitative Easing

program (QQE), the year-on-year rise in the core consumer price index (excluding

fresh food) remains below 1%, far from the central bank's 2% inflation target.

     --FOCUS ON WAGE/PRICE HIKES

     The BOJ focus remains on whether more companies will raise wages and retail

prices in the coming months, pushing up consumer inflation. Many firms are

absorbing higher materials and labor costs but some are facing the limit of

their ability to raise productivity to offset these costs, BOJ officials

believe.

     BOJ economists think labor productivity is rising, which should increase

upward pressure on wages. To monitor whether this is happening, they will look

closely at corporate inflation expectations data to be released Monday as part

of the bank's December Tankan business survey. Tankan data on business sentiment

and capital expenditure plans are due on Friday.

     In the September Tankan survey, companies on average revised down their

expectations for the CPI one year ahead from the June survey, but left their

inflation outlooks for three and five years ahead unchanged.

     Inflation has been slow to rise despite the sustained, modest economic

recovery but BOJ officials believe the momentum toward 2% inflation is being

maintained.

     --NO IMMEDIATE RISKS

     The BOJ policy statement to be released after the Dec. 20-21 meeting won't

show any detailed risk assessment but comments from board members indicate they

are maintaining the central bank's view presented in the last Outlook Report

issued on Oct. 31 that risks to growth are largely balanced while those to

inflation are skewed to the downside.

     The board shares the view that both advanced and emerging economies are

likely to continue growing in a well-balanced manner and that the global economy

will maintain solid growth.

     Since there is no large immediate risk to Japan's economy, some BOJ

officials believe the only risk facing monetary policy is if policymakers become

"overly optimistic" at this point.

     Some board members have pointed to potential side-effects of the easy

policy but the official line is that no serious side-effects have been observed.

     --NO POLICY SHIFT

     In his speech at the University of Zurich last month, BOJ Governor Haruhiko

Kuroda mentioned a "reversal rate," referring to the risk that an excessive drop

in interest rates would impair financial institutions' intermediation function.

Under these circumstances, "the effects of monetary easing on the economy

reverses and becomes contractionary," he said.

     His comments triggered speculation in financial markets that the BOJ was

considering beginning to unwind its large-scale monetary stimulus or, at the

very least, that Kuroda had no intention of conducting any further monetary

easing.

     BOJ officials deny that the speech had any policy implications and they

stress that it was delivered to an academic audience.

--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

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

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