MNI PREVIEW: BOJ To Stand Pat, But May Tweak Language

By Hiroshi Inoue

     TOKYO (MNI) - With some signs of stability in corporate investment plans at

home, there is no immediate need for the Bank of Japan to act at this week's

meeting, although the inflation outlook may push the board to consider issuing

fresh guidance regarding the outlook for both policy and inflation.

     The BOJ will update its medium-term economic outlook through FY21 following

the two-day policy-setting meeting that ends Thursday and it appears unlikely

the forecasts will point to inflation reaching 2% target within that time frame.

     That forecast would leave the Board in a position where not taking policy

action would be inconsistent with hitting target at the possible earliest time,

so policymakers could add language that both justifies the BOJ's price view and

assures financial markets that the central bank is not yet out of policy

options.

     BOJ officials in charge of policy planning have no preconceptions as to how

this week's meeting will go and will be well prepared to brief Board members.

However, a straight shift in current monetary policy is seen as unlikely.

     There is unlikely to be any sharp revisions from January's inflation

outlook of +1.1% for 2019 and 1.5% for 2020 when the latest Quarterly Outlook

Report is published on Thursday. The first forecast for FY2021 is also expected

- and it will unlikely be lower than 2020's 1.5% as that would signal a break in

momentum towards achieving the 2% price target.

     Any such weakening would make it difficult for the BOJ to say "momentum

toward hitting the 2% price target is maintained", increasing pressure on the

board to consider additional easy policy measures.

     --INFLATION EXPECTATIONS FLAT

     Japan's inflation expectations haven't weakened, but there is little sign

upward momentum and the BOJ will likely maintain the view they will be unchanged

in months ahead.

     The short-term inflation outlook among Japanese consumers has risen

slightly in the wake of the recent rise in grocery but longer-term, the view was

unchanged, the recent data showed.

     --POSITIVE OUTPUT GAP

     Japan's estimated positive output gap widened to 2.23 percentage points in

Q4, up from 1.26 percentage points in Q3, the BOJ said, the biggest positive gap

since the post bubble bust Q2 1992 when it was at +2.39 ppt.

     The Oct-Dec period positive gap was a ninth consecutive and should increase

pressure on consumer prices and inflation expectations, albeit with a lag of a

few quarters - although the recent correlation between the output gap and prices

has been less than seen historically.

     BOJ officials don't expect weak overseas demand to immediately impact

domestic demand as capital investment to cope with labor shortages and to

replace ageing equipment remains solid.

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

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