MNI INSIGHT: Some At BOJ See Risks Balanced, Others Cautious

By Hiroshi Inoue

     TOKYO (MNI) - The recent positive signs suggesting the modest Japanese

recovery will be sustained have some Bank of Japan officials believing the

central bank can upgrade its economic assessment to say upside and downside

risks are largely balanced, MNI understands.

     But other BOJ officials remain cautious, and may be more comfortable with

maintaining the current assessment that risks to economic activity are skewed to

the downside. 

     It is still uncertain whether the board will agree at its two-day policy

meeting ending next Tuesday to upgrade its assessment, as board members' views

appear to be mixed.

     In addition to the resilience of domestic demand, external demand is

gaining momentum, indicating that the chance that Japan's economy could be

derailed from its current sustainable recovery path is low, some BOJ officials

believe.

     "How the board will assess downside risks to economic activity will be one

of the topics at the meeting. The risk factors are largely unchanged, but the

degree of downside risk is smaller than it was three months ago," said a person

familiar with BOJ thinking.

     The person, however, said that the final decision on whether to upgrade the

assessment will depend on discussions at the meeting.

     In its last quarterly Outlook Report issued in July, the BOJ said, "With

regard to the outlook for economic activity, risks are skewed to the downside,

particularly regarding developments in overseas economies."

     As for the bank's view on inflation, the board is likely to maintain its

assessment that downside risks to prices are larger than upside risks due to

continued weak consumer price data.

     Japan's economy continues to be supported by balanced growth in domestic

demand, including private consumption, capital investment and public works

spending.

     BOJ economists believe that even if one of the major components loses

steam, it will be offset by the strength of other factors, meaning that Japan's

economy is likely to continue expanding moderately.

     In addition, they are encouraged by the pickup in exports in the

July-September quarter following a temporary slump in April-June.

     The real export index, calculated by the BOJ based on trade data released

by the Ministry of Finance, dropped 5.4% month-on-month in September after

rising 3.0% in August and 1.7% in July. However, the real export index rose 1.9%

on quarter in the third quarter, following a 0.5% drop in April-June and a 2.8%

gain in January-March.

     BOJ officials focus on quarter-on-quarter changes in real exports to gauge

the underlying trend.

     The contribution of net exports to gross domestic product is expected to

turn positive in the third quarter after a negative contribution of 0.3

percentage point in the second quarter.

     BOJ officials also gauge that global economic conditions are better than

three months ago, based on the upward revision to global economic growth

projections by the International Monetary Fund.

     The IMF said in its World Economic Outlook this month that global economic

growth is expected to hit 3.6% in 2017 and 3.7% in 2018, both a tenth of a point

higher than reported in April and July.

     The BOJ board is likely to maintain a cautious inflation outlook as prices

have been slow to respond to firmer economic activity.

     In July, the BOJ said, "Firms' wage- and price-setting stances have

remained cautious despite the steady tightening of labor market conditions and

the high levels of corporate profits."

     "A rise in medium- to long-term inflation expectations has lagged behind

somewhat, as such expectations are largely affected by the observed inflation

rate," it added.

     BOJ economists don't think the lag in inflation expectations is any larger

than they expected in July, but they also believe it will take more time before

inflation expectations show a clear pickup.

--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

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