MNI REVIEW: BOJ On Hold; GDP Seen Higher, But Inflation Lower

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is upbeat over a modest easing in downside

risks for global economies following the signing of the the 'Phase One' trade

deal by the U.S. and China, but policymakers continue to fret over over

precariously low inflation levels.

     "Downside risks concerning overseas economies seem to be still significant,

although they have decreased somewhat compared to a while ago, and it also is

necessary to pay close attention to their impact on firms' and households'

sentiment in Japan," the BOJ said in its monetary policy statement Tuesday.

     Despite upward revisions to its GDP outlook, the BOJ revised down its core

inflation rate forecasts, underlining how far from goal the central bank remains

in hitting its 2% price target.

     The BOJ noted, "the situation likely has continued in which the

responsiveness of prices to the output gap, as well as inflation expectations

that are strongly affected by the adaptive formation mechanism, do not rise

easily."

     BOJ officials will have to continue grappling with a situation that has

stagnating inflation levels despite an economy in overall good shape.

     The central bank left policy unchanged, with little sign Japan's economy

has deviated from its baseline recovery outlook, although broad downside risks

to economic activity and prices remain. The board voted 7-2 to stand pat on the

yield curve control and asset purchases.

     Speaking to the press following the decision, Governor Haruhiko Kuroda said

"the BOJ will maintain its easing bias for the time being."

     --ADDITIONAL MEASURES

     In its accompanying statement, the BOJ said it "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", although for now it

is happy to stand pat as it feels there is still underlying price momentum.

     The next Outlook Report, including the first growth and inflation forecasts

for fiscal 2022, a period that ends Mar 31, 2023 -- just days before Kuroda's

second term ends.

     If the BOJ's median inflation rate forecast in fiscal 2022 is below 2%,

this would signal that Kuroda is not seen hitting the 2% price target through

his 10-year tenure.

     --OUTLOOK

     The BOJ has upgraded its median forecasts for real economic growth rates in

this fiscal year, fiscal 2020 and fiscal 2021, boosted by the government's

latest economic stimulus measures.

     The Bank's medium-term inflation forecasts were left broadly unchanged from

the three months ago, with no noticeable pick-up IN inflation expectations.

     The median forecast for GDP in the current fiscal year was revised up to

+0.8% from +0.6% and those for fiscal 2020 and 2021 were revised to +0.9% and

+1.1% from +0.7% and +1.0% made in October, respectively.

     The median forecast for core inflation rate in the current fiscal year was

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

were revised to +1.0% and +1.4% from +1.1% and +1.5% made in October, but noted

risks "remain skewed to the downside."

--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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