MNI INSIGHT: BOJ Cautious About CPI Outlook After Dec Tankan

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials are somewhat heartened to see that

near-term corporate inflation expectations have edged up from three months ago

but they remain cautious about the overall price outlook, which has been slow to

pick up.

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

a face pace in the face of the stubborn deflationary mindset among businesses

and concerns about the sustainability of social security programs among

households.

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

2% inflation target is intact, patiently watching the stimulatory effect of

large-scale monetary easing on wage hikes and retail price markups amid the

sustained but modest economic recovery.

     The BOJ on Monday released the CPI outlook among companies polled in its

quarterly Tankan survey for December, conducted from Nov. 14 to Dec. 14. The

main parts of the survey on business sentiment, investment plans, labor and

product supply and demand conditions among other topics were released Friday.

     --ONE-YEAR PRICE OUTLOOK UP SLIGHTLY

     In the December Tankan survey, companies on average revised up their

expectations for the consumer price index in a year's time from the previous

Tankan survey, but left their inflation outlook for three and five years ahead

unchanged from September.

     Firms on average expect the annual consumer inflation rate to stand at 0.8%

a year from now, up from the 0.7% projected in September. It was the first rise

in expectations since June, when the near-term price outlook was revised up to

0.8% from 0.7% in March.

     But BOJ economists are more focused on inflation expectations three and

five years ahead in assessing inflation trends. Firms' inflation forecasts for

three and five years ahead were unchanged at 1.1% each in December.

     Japan's national average core CPI (excluding fresh food) rose 0.8% on year

in October, marking the 10th straight year-on-year rise after +0.7% in

September.

     Excluding the upward pressure from energy prices, the underlying price

trend has shown a slow improvement. The core-core CPI (excluding fresh food and

energy) rose 0.2% on year in October after rising 0.2% in September.

     BOJ officials hope the pickup in the CPI, although slow, helps support the

move among some firms to raise wages at annual labor management talks early next

year.

     The wage hikes in April 2017 were based on weak consumer prices in calendar

2016. Last year, the total consumer price index on average fell 0.1% from a year

before. By contrast, total CPI has risen 0.41% on average in the first 10 months

of this year.

     A faster pace of wage increases is the key to making businesses and

households believe that prices will rise steadily every year toward the central

bank's elusive inflation goal of 2%.

     --INFLATION EXPECTATIONS HIT BOTTOM

     Inflation expectations have stopped falling but they also do not show a

clear uptrend, BOJ economists have judged.

     They will further analyze the situation by looking at household inflation

expectations included in the bank's quarterly consumer sentiment survey due on

Jan. 11.

     Some data showed that the underlying trend of prices has shown a gradual

pickup.

     The 10% trimmed mean of the total CPI rose 0.5% on year in October,

unchanged from +0.5% in September after falling from +0.6% in August. The pace

of increase has accelerated from +0.1% seen earlier this year.

     Figures are the weighted averages of the year-on-year price changes in

individual items making up the CPI. Items are arranged in ascending order of

their year-on-year rate of price change and those falling into the upper and

lower 10% tails by weight are trimmed.

     The diffusion index, showing the share of increasing items minus the share

of decreasing items, rose to 24.1 in October, after falling to 18.7 in September

from 22.9 in August.

     In addition, the output gap of the economy -- one of the key factors that

affect inflation -- was 1.22 percentage points in the April-June quarter, the

third straight positive figure following +0.75 in January-March and +0.45% in

the final quarter of 2016.

     The improvement in the output gap is expected to increase upward pressure

on consumer prices and inflation expectations with a lag of a few quarters.

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

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