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Schatz straddle


Some early pullback

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
     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.
     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.
     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.
     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
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:
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