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

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