MNI INSIGHT: Momentum Worry May Trigger Pre-emptive BOJ Action

By Hiroshi Inoue

     TOKYO (MNI) - Concern over Japan's weaker economy and the output gap's

influence on achieving the 2% inflation target may prompt the Bank of Japan

board to discuss a pre-emptive easing next week, MNI understands.

     With no new economic data showing a significant worsening of economic

fundamentals and an imminent economic downturn, the BOJ has no immediate need to

ease policy.

     However, the view shared by the BOJ as well as the U.S. Federal Reserve and

the European Central Bank is that downside risks to the global economy have

heightened and a recovery of the global economy is delayed.

     Heightened uncertainties over the global economy would undermine the

baseline scenario, prompting the BOJ to preemptively consider acting in response

to the bigger risks.

     BOJ officials expect Japan's exports to remain weak for the time being on

the back of the slowdown of leading global economies.

     However, those officials expect Japan's economy to be supported by a

recovery of exports following a slow pickup of the global economy, even if

private consumption weakens due to the reaction of the last minute surge in

demand before the consumption tax hike on Oct. 1.

     However, a delay of the global economic recovery and a weaker Japanese

economy, below the potential growth rate estimated in the range of 0.5-1.0%,

will narrow the positive output gap, which in turn will weaken the momentum

toward achieving the 2% price target.

     If firms and households are worried over the sustainability of the positive

output gap to be caused by a slower economy, they will strengthen the cautious

wage- and price-setting stance of Japanese firms and household caution on price

rises.

     The BOJ board at the June 19-20 policy meeting added new risks to the

policy statement, saying: "It also is necessary to pay close attention to their

(heightened downside risks to overseas economies) impact on firms' and

households' sentiment."

     BOJ officials are worried about the recent worsening of sentiment surveys

and their impact on solid capital investment plans and consumer spending.

     The BOJ may consider increasing the scale of its purchases of ETFs

(exchange traded-funds) from about Y6 trillion annually or take a more flexible

stance regarding its ETF buying in addition to the strength of the forward

guidance for policy rates.

     Extending the forward guidance for policy rates from "around spring 2020"

and widening a range of the 10-year interest rate from around -0.20% to +0.20%

are other options.

     BOJ officials in charge of monetary policy are worried over policy

decisions amid uncertainty over the outcome of the U.S. Federal Reserve's policy

meeting - due a day after the Japanese policy announcement.

     The BOJ also will need to consider measures such as increasing the basic

balance (+0.1% is applied), to mitigate the unfavorable effects of more easing

on financial firms and the financial system.

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

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

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