MNI INSIGHT: Trade and Sentiment To Guide Any Early BOJ Action

By Hiroshi Inoue

     TOKYO (MNI) - There is increasing concern at the Bank of Japan that a

further decline in global trade will hit exports and weigh on manufacturers'

sentiment, risking a loss of momentum towards hitting its 2% price target, MNI

understands.

     The continued headwinds for the Japanese economy from ongoing trade

disputes and the global slowdown could push the BOJ to consider pre-emptive

policy action before downside risks increase.

     The BOJ is worried a prolonged slowdown in overseas economies will worsen

manufacturer sentiment, delay capital investment and ease some of the tightness

in the labor market, which in turn will filter through to non-manufacturers and

have a greater impact on the domestic economy.

     Declining exports and a dip in associated sentiment will be a big drag on

Japan's economy into the end of the year, as the BOJ hopes overseas sales will

pick up any slack from a slowdown at home.

     The BOJ is already concerned that domestic demand will slow in Q4, as

consumption will likely be brought forward into Q3 to avoid the sales tax

increase set to kick in on October 1, further pressuring prices lower as it will

make it more difficult for companies to increase prices to recoup higher costs. 

     That will filter through into increased downward pressure on inflation

expectations and further slow the momentum towards the price target, the BOJ

warns.

     --PRE-EMPTIVE

     The BOJ will face growing calls to act pre-emptively to address growing

downside risks in a similar way to U.S. Federal Reserve, the European Central

Bank and other regional central banks and the bank has already said it "will not

hesitate to take additional easing measures if there is a greater possibility

that the momentum toward achieving the price stability target will be lost". 

     July saw the Fed cut its federal funds rate for the first time in a decade

and signalled additional adjustments may be in store to keep U.S. growth on

track amid muted inflation pressures, trade tensions and a global slowdown.

     With both projected and realised inflation rates below target, the ECB has

taken steps towards a September package of easing measures that includes lower

rates, changes to forward guidance and the possibility of a return to QE and

maybe tiering of deposit rates.

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

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

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