MNI INSIGHT: BOJ To Cut Infla View; Econ Recovery View Intact

--BOJ Likely To Stand Pat At Jan Meet; Policy Options Limited

By Hiroshi Inoue

     TOKYO (MNI) - Despite increasing downside risks to the global economy, Bank

of Japan officials maintain the view that Japan's economy is expected to expand

moderately, but they will likely downgrade their outlook for inflation MNI

understands.

     BOJ officials are aware of bigger downside risks to the global economy,

partly from increased volatility in financial markets, but they see no need to

change their baseline recovery scenario as they haven't ascertained decisive

worsening of economic conditions through visible data since the December policy

meeting.

     --LOWER INFLATION VIEW

     The board will likely stand pat on monetary policy at its two-day

policy-setting meeting ending on Jan. 23. 

     They will also review the medium-term real economic growth and inflation

outlook at the meeting, likely lowering their median inflation forecast in

fiscal 2019 and fiscal 2020 from the current +1.4% and +1.5% in the wake of weak

price data and the fall in crude oil prices.

     The BOJ are expected to repeat the view that the momentum toward achieving

the 2% price target is maintained but will consider how to deepen communication

with financial markets. Board members remain vigilant against downside risks to

Japan's economy amid volatile financial markets and the uncertain global

economic outlook.

     Volatile financial markets worldwide are darkening the global economic

outlook and growing downside risk to Japan's economy, increasing pressure on BOJ

officials to pre-emptively consider policy tools. BOJ officials overseeing

monetary policy will face the troublesome situation of how to handle further

easing, as the BOJ is running out of options to help the economy.

     --INFLATION REMAINS SLOW

     Those officials maintain the view that the improvement of inflation rate

remains slow compared with an economic expansion and the tight labor market

conditions.

     They are paying attention to the risk that the momentum toward hitting the

2% price target weakens to be caused by weaker consumer prices in or after April

when downward pressure from the drop in crude oil prices on consumer prices is

expected to appear.

     In 2015, inflation expectations had fallen in the wake of a combination of

the slowing Chinese economy and the drop in crude oil price.

     BOJ officials thinks that the magnitude of the impact this year is smaller

than that of 2015 but they are worried about the similar drop, or the

second-round effects of lower prices.

     --CAPEX IS KEY

     BOJ economists see the development of capital investment as a key factor of

an economic recovery mechanism, judging current plans remain solid based on

economic data linked to capex.

     The BOJ regional economic report released Jan. 10 said all nine regions

reported their economies are either expanding or recovering, which may indicate

limited impact to date from a slowing global economy and the China-U.S. trade

dispute.

     But the BOJ also said, "a gradually increasing number of firms are pointing

to some effects, such as a decline in orders."

     BOJ economists are focused on how the beginning of capital investment plans

in fiscal 2019 in the March Tankan business sentiment survey due out on April 1

deviates from the historical average level.

     There is also a concern that the market volatility, if continued, will

quickly worsen business and household sentiment, impeding their spending, which

in turn will endanger the virtuous cycle for a sustainable economic recovery.

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

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

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