MNI POLICY: BOJ Lowers Inflation Forecast; Downside Risks.

--Momentum To 2% price target intact; not sufficiently Firm

     TOKYO (MNI) - The Bank of Japan on Thursday lowered its median forecast for

inflation rate for this fiscal year and next, the BOJ quarterly Outlook Report

showed.

     The central bank trimmed the forecasts to +0.7% and +1.1% respectively from

July's +1.0% and +1.3%, and also lowered its inflation rate for fiscal 2021 to

+1.5% from +1.6%.

     Despite the downward revision to the inflation forecasts, the BOJ

maintained the view that the momentum toward achieving the 2% price target was

maintained, but noted that it's not sufficiently firm.

     It also said downside risks to economic activity and prices are larger than

upside risks.

     Other key points from the Outlook Report:

     --The median forecast for gross domestic product in this fiscal year was

revised down to +0.6% from +0.7% and the GDP forecasts in fiscal 2020 and 2021

were revised to +0.7% and +1.0% from July's +0.9% and +1.1%.

     --The BOJ maintained its recovery view, saying, "Japan's economy is likely

to continue on an expanding trend throughout the projection period" through

fiscal 2021 as the impact of the slowdown in overseas economies on domestic

demand is expected to be limited.

     --The BOJ maintained its cautious view on risks, saying, "With regard to

the risk balance, risks to economic activity are skewed to the downside,

particularly regarding developments in overseas economies."

     --Risks to prices are skewed to the downside, mainly due to the 

uncertainties over developments in medium- to long-term inflation expectations."

     --"There is no sign so far of excessively bullish expectations in asset

markets or in the activities of financial institutions. However, prolonged

downward pressure on financial institutions' profits, with the low interest rate

environment and severe competition among financial institutions continuing,

could create risks of a gradual pullback in financial intermediation and of

destabilizing the financial system."

     --The consumer price index "has continued to show relatively weak

developments compare to the economic expansion and the labor market tightening."

     --The BOJ maintained the view that Japan's inflation rate is likely to

increase toward 2% "mainly on the back of the output gap remaining positive and

medium- to long-term inflation expectations rising."

     --The BOJ also kept its optimistic view on the outlook for the output gap,

saying, "the output gap, which shows the utilization of labor and capital, has

been substantially positive, reflecting tight labor market conditions and high

levels of capital utilization rates."

     Japan's estimated positive output gap narrowed to 1.04 percentage points in

the April-June quarter as supply tightened and demand firmed, for the 11th

straight quarter with a positive output gap but falling from 1.64 pp in

January-March, the latest data showed.

--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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