MNI INSIGHT: BOJ To Maintain Policy Stance At Sept Meeting

--BOJ See No Need For Additional Monetary Stimulus At This Time

--BOJ Can Keep 10-Year JGB Yields Near Zero Percent Target By Slowing JGB

Purchases

By Hiroshi Inoue

     TOKYO (MNI) - While the pickup in the inflation rate remains slow, Bank of

Japan officials don't think the economy needs additional monetary stimulus at

this time to ensure prices will move toward its 2% inflation target, MNI

understands.

     The BOJ board is expected to maintain its current monetary policy stance at

its two-day meeting Sept. 20-21 and for some time after that, given the economy

is continuing the moderate expansion expected by the board and geopolitical

risks have not seriously hurt business or consumer confidence.

     Long-term interest rates slipped into negative territory last week on

safe-haven buying, but officials believe the central bank can keep 10-year

government bond yields near the target of around zero percent by slowing the

pace of its asset purchases.

     There are no economic data as yet that show any impact on the economy from

market volatility caused by heightened tensions between the U.S. and North

Korea. The central bank worries that safe-haven buying of the yen could cause

exporter profits to fall and so slow job creation and wage growth.

     Key indicators of production, consumption and inflation for August will be

released after the Sept. 20-21 BOJ meeting.

     The primary focus for the board members at next week's meeting is whether

the recent slight acceleration in inflation will continue after positive base

effects from sharp energy price increases in the middle of last year fade out

later this year.

     They are also monitoring how the wage hikes set by major firms for the

current fiscal year that began in April are spreading to small businesses and

whether more firms will raise retail prices. While postal and home delivery

service prices are rising along with prices at some restaurant chains, major

retailers are cutting prices for household goods, furniture and clothing in

order to lure customers.

     The pickup in inflation remains slow but the BOJ believes that the momentum

toward achieving its 2% inflation target is being maintained, allowing the BOJ

board to watch the developments in CPI data without considering taking

additional easing steps.

     "The economy is expanding moderately as the board predicted, and the focus

remains on how fast inflation accelerates even as prices rise more slowly than

economic activity," said a person familiar with BOJ thinking.

     Firms have increased their prices only slightly because they are absorbing

higher material and labor costs by cutting services and business hours, the

person said, adding that higher producer prices have had only a limited impact

on consumer prices so far.

     Government data show that Japan's national average core CPI (excluding

fresh food but including energy prices) rose 0.5% on year in July, the seventh

straight year-on-year rise, after +0.4% in June. The key indicator of inflation

posted the first rise in 13 months in January.

     Excluding the upward pressure from energy prices, the underlying price

trend has shown a slower improvement. The CPI excluding fresh food and energy

(the core-core CPI) rose 0.1% on year in July, after being flat in the previous

three months and falling 0.1% in March.

     The board is expected to keep its assessment of inflation expectations

unchanged from its previous meeting in July. The inflation outlooks by

businesses and households have stopped falling but haven't shown a clear rise

yet.

     In July, the BOJ said, "Inflation expectations have remained in a weakening

phase," adding that "a rise in medium- to long-term inflation expectations has

been lagging behind somewhat, as such expectations are largely affected by the

observed inflation rate."

     "The situation is unchanged," said another person familiar with BOJ

thinking. "The economy is strong but prices are weak, although inflation

expectations seem to have bottomed out."

     "It takes time for inflation expectations to rise," the person added.

     The BOJ said as much in its statement in July: "Medium- to long-term

inflation expectations are projected to rise as firms' policies gradually shift

toward raising wages and prices as the improvement in the output gap continues."

     The BOJ estimates the country's output gap to be +0.79% in the

January-March quarter, the third straight positive figure following +0.57% in

the final quarter of 2016 and +0.07% in the third quarter. The estimate for

April-June this year will become available early next month.

     The second person said the pace of the year-on-year increase in consumer

prices remains slow but is within the forecast range the BOJ board predicted in

July.

     To judge the outlook for inflation expectations, BOJ economists are focused

on the corporate inflation expectations portion of the September Tankan business

survey due out Oct. 3 and the household inflation expectations of the central

bank's quarterly survey of consumer sentiment due out Oct. 6.

     Believing the September meeting is a non-event, market participants are

waiting for the BOJ's next policy meeting on Oct. 30-31, when the board releases

its updated growth and inflation predictions as well as its risk analysis. 

     Ahead of their October meeting, BOJ policymakers will watch how business

sentiment and investment plans are evolving, as revealed in the Tankan survey

and anecdotal evidence from BOJ branch managers who will gather in Tokyo for

their quarterly meeting on Oct. 10. September CPI data will be released on Oct.

27 and September household spending and industrial production on Oct. 31.

--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

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

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]