MNI INTERVIEW: Ex-BOJ Momma: Above 1% Core-Core CPI Uncertain

By Hiroshi Inoue

     TOKYO (MNI) - Japan's "core-core" consumer price index excluding fresh food

and energy items may rise to around 1% on year temporarily by the end of the

year but it is uncertain whether the key inflation indicator will continue

rising above 1%, Kazuo Momma, a former chief economist at the Bank of Japan,

told MNI.

     --1% CORE-CORE CPI

     "If the core-core CPI stays above 1% and the BOJ board is confident that

the index will not fall back below 1%, BOJ officials will begin debating the

normalization of easy policy. But it is unpredictable whether (the rise in) the

index will stay above 1%," Momma said in an exclusive interview with MNI on

Thursday.

     Momma is currently executive economist at Mizuho Research Institute. He

left the central bank in 2016 at the end of his term as executive director.

     Government data released Friday showed that Japan's core-core CPI rose 0.4%

on year in April, slowing from +0.5% in March. The year-on-year rise in the core

CPI (excluding fresh food) decelerated to 0.7% in April from +0.9% in March, far

from the BOJ's 2% price stability target.

     --FAVORABLE OUTPUT GAP

     Momma predicts Japan's benchmark inflation rate measured by the core-core

CPI will not rise to 2% under the existing economic structure amid the shrinking

working population, but he also believes the index will not slow down sharply as

the output gap continues to improve.

     He noted that while this week's data showed the economy contracted in the

first quarter following relatively strong growth in 2017, the conditions for

sustained growth -- employment and income -- are better than five years ago,

when the BOJ began aggressive easing.

     The gross domestic product (GDP) shrank a real 0.2% on quarter, or an

annualized 0.6% in Q1, posting the first contraction in nine quarters as the

severe winter weather and high fresh food and fuel prices hurt consumption,

which government officials see as a temporary blip.

     "The output gap for the first quarter may slow from the previous quarter

but it would be better than improving at an unsustainable pace," Momma said.

     --UNNECESSARY EASING

     The positive output gap resulting from tighter supply and firmer demand

widened to 1.50 percentage points in the final quarter of 2017 from 1.14% points

in July-September. It was the fifth straight quarter of the gap being in

positive territory and much wider than the 1.05% points in April-June 2017,

0.67% points in January-March and 0.26% points in October-December 2016.

     Given this improvement, Momma thinks the BOJ can reduce the scale of some

of its asset purchases.

     "The easy policy is necessary to achieve the 2% price target but monetary

easing aimed at supporting the economy isn't necessary," he said, referring to

the zero percent target for the 10-year bond yield and large-scale purchases of

exchanged traded funds.

     --FUTURE ECONOMIC SLOWDOWN

     Momma warned that the pace of Japanese economic growth is expected to slow

in the coming fiscal years, judging from the current expansionary business cycle

that seems to have peaked in fiscal 2017.

     "Even if the pace of economic growth slows, upward pressure from the

(improved) output gap on inflation will remain, a view shared by private

economists and BOJ officials alike," he said. "The key is the degree of an

economic slowdown. If it were sharp, it would weaken the upward pressure on

prices."

--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

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