MNI INTERVIEW: Output Gap Sub-1% Vital To BOJ Ease: Ex-Off'l

--Ex-BOJ Momma: Deepening Negative Short-Term Rate 'An Option'

--Momma: BOJ Lowers Hurdle To More Easing; Economy Slowing But No Recession

By Hiroshi Inoue

     TOKYO (MNI) - Japan's output gap is narrowing and will likely dip below 1%,

making it more difficult for policymakers to claim continued momentum toward

hitting the 2% price target, although the central bank is running out of viable

policy reactions, a former Bank of Japan chief economist told MNI in an

interview.

     Deepening the short-term policy rate from the current -0.1% would be one

"feasible" option, but it would be undesirable and the BOJ should consider it

carefully, said Kazuo Momma, now executive economist at Mizuho Research

Institute.

     "The BOJ pledged to take additional easing without hesitation through (its

latest) policy statement. This is a big change of its policy stance and means

the BOJ has lowered the hurdle to taking additional easy policy," Momma said.

     --NARROWING GAP

     According to Momma, the output gap is a crucial factor for the BOJ when

judging momentum towards its price target. The gap narrowed to around +1.3% in

Q1, down from just under 2% in q4 2018, the latest BOJ data shows, but still the

10th straight quarter with a positive reading. That had been expected to

increase pressure on consumer prices and inflation expectations, albeit with a

lag of a few quarters.

     Momma expects the positive output gap to narrow further in the coming

quarters and if the gap falls below 1%, it would mean momentum towards the price

target nearing the condition that the BOJ judges as critical.

     The BOJ backed away from any pre-emptive easing measures at the July 29-30

meeting, leaving policy unchanged, as the economy continues to expand

moderately, underpinned by solid domestic demand, although greater downside

risks are seen. As Momma noted, the bank "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."

     The BOJ said it expected the output gap to remain "substantially positive",

but Momma said that the position is weaker than the situation assessed by the

Bank in July.

     --OPTIONS

     Discussing options the central bank has to deal with a slowing economy,

Momma sees a much reduced toolbox for policymakers. "Governor Kuroda cited four

options. But expanding asset purchases and accelerating the monetary base

injection aren't feasible as the BOJ is conducting the yield curve control

policy," he said

     Kuroda has previously cited four policy options; lowering the short- and

long-term policy rates; expanding asset purchases; and accelerating the pace of

injecting monetary base.

     Lowering the long-term interest rate is impossible as the BOJ has said

flattening the yield curve is undesirable, Momma said.

     He said lowering the short-term policy rate is only policy option, but

mitigating action should be taken alongside the move, such as increasing excess

reserves implied to +0.1%, helping lessen the negative impact on commercial

banks.

     Japan has been slowing since late last year but there is little chance of

dipping into recession, Momma said, with the economy "in good shape under full

employment", although there were building downside risks - although he played

down concerns over yen strength.

     "A rapid exchange rate movement is undesirable," Momma said. "Consumer

sentiment has worsened recently amid concern over higher prices caused by the

consumption tax hike and high costs," he said, adding, "a gradual yen rise would

lower import costs, which would be favorable for consumers."

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

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

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