MNI INSIGHT: BOJ Cautious After Consumer Price Outlook Setback

By Hiroshi Inoue

     TOKYO (MNI) - The recent slowdown in the cost of living supports

flat-lining consumer confidence but it also dampens inflation expectations,

which could make the process of guiding low inflation to the Bank of Japan's 2%

target, a series of BOJ data released this week showed.

     This means that at its next policy meeting on Oct. 30-31, the BOJ board

will maintain its cautious view that it will take more time before inflation

expectations among both households and businesses start picking up.

     BOJ officials believe that the slow pickup in consumer prices should

eventually help turn around the stubborn deflationary mindset prevailing among

households and businesses, despite the setback in inflation expectations found

in the bank's surveys, MNI understands.

     Consumers, unsurprisingly, do not pay attention to reported recent gradual

improvements in the economy's output gap -- a combination of higher demand and

tighter supply -- but they are more sensitive to fluctuations in the prices for

daily goods and services.

     The BOJ's quarterly consumer survey released Friday showed that the

percentage of respondents expecting prices to rise in the next year stood at

70.4% in September, down from 75.4% in June, while 1.9% said prices would fall

in the next year, down from 2.4% three months earlier.

     Those saying prices would be little changed 12 months ahead rose to 26.7%

from 21.6%. The median CPI forecast by consumers stayed at +2.0%, according to

the survey conducted from Aug. 10 to Sept. 5.

     Looking five years ahead, 81.4% said prices would rise, down from 82.3%

three months earlier. Meanwhile, 3.8% of the respondents expected prices to

fall, up from 3.1% in June. Those saying prices would be little changed was

unchanged from June at 12.7%. The median forecast stayed at +2.0%.

     This follows the release Tuesday of the CPI outlook among companies polled

in the BOJ quarterly Tankan survey for September conducted from Aug. 29 to Sept.

29. Companies on average revised down their expectations for the consumer price

index one year ahead from the previous Tankan survey, but left their inflation

outlook for three and five years ahead unchanged from June.

     BOJ economists are more focused on households' inflation expectations five

years ahead than those one year ahead. They believe the drop in inflation

expectations five years ahead is due mainly to flat food prices and lower

gasoline prices in the past few months.

     In the BOJ's analysis, until recently, every age group, particularly the

younger generation, have tended to revise up their 5-year inflation expectations

in response to a rise in the prices for frequently purchased items (food and

energy). In the latest survey, those polled are believed to have responded to a

pullback in vegetable prices after bad weather had pushed them up.

     In response to a rise in the prices for other items, such as consumer

electronics, those in middle age have tended to revise up their 5-year inflation

expectations in line with mark-ups in goods and services other than food and

energy. Other age groups have shown little reaction.

     In the national average consumer price index, the prices of fresh food rose

0.9% on year in August, after rising at the same pace in the previous month.

     The pace of the year-on-year rise in retail gasoline prices has been tame

in recent months, up 7.8% in August after +6.3% in July and +6.1% in June,

slowing from +12.3% in May and +14.9% in April.

     On the upside, tamer daily goods prices are supporting consumer confidence.

     The BOJ survey released Friday also showed its consumer sentiment diffusion

index for the current climate rose by 2.7 points to -13.5 in September, posting

the third consecutive gain as more people said they believed Japan's economic

growth prospects were rising.

     The survey showed that the number of people who said that their income had

risen from a year earlier increased slightly from three months earlier.

     But the consumer sentiment outlook index projecting conditions a year ahead

marked the first drop, decreasing 0.7 points to -18.0 in September after rising

0.7 points in June.

     The latest government data released Tuesday also showed calmer prices

supported confidence.

     The Cabinet Office's consumer confidence index rebounded 0.6 point to 43.9

in September on a seasonally adjusted basis, backed by moderate weather and a

lull in sabre rattling between North Korea and the U.S. over Pyongyang's nuclear

arms threat.

     It was the first month-on-month rise in two months after falling 0.5 point

to 43.3 in August.

     The government's Consumer Confidence Survey, which was conducted on Sept.

15, also showed that consumer inflation expectations for 12 months ahead were

mixed in September.

     The share of those projecting price rises edged up to 76.2 from 76.1% in

August while the share of respondents forecasting lower prices rose to 4.9% from

3.5% in the previous month in the wake of recent falls in vegetable prices.

--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 London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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