MNI STATE OF PLAY: BOJ Policy Stance, CPI View Seen Unchanged

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan board will maintain the current monetary

easing stance at its two-day policy meeting ending Tuesday, also leaving

unchanged what many see as an optimistic outlook that the bank can guide low

inflation to its 2% target by around fiscal 2019, MNI understands.

     The board is expected to repeat its latest quarterly medium-term outlook

released in October that the moderate economic expansion will continue for now,

based on balanced domestic and overseas demand, and that the momentum toward

achieving the 2% inflation target is maintained, BOJ economists believe.

     Under the yield curve control framework, the BOJ is seeking to stabilize

the 10-year government bond yield, the benchmark for long-term borrowing costs,

at around zero percent and keep the overnight interest rate at -0.1%.

     The BOJ's asset purchases, which are no longer the main policy target, will

be maintained at the current pace. Officially, the outstanding amount of its JGB

holdings will increase by about Y80 trillion annually, but the pace has slowed

in light of the recent drop in yields and this does not have any policy

implications.

     The focus among central bank policymakers remains on whether the recent

gradual rise in consumer prices and inflation expectations will accelerate in

fiscal 2018 starting in April. They are hoping firms will raise wages at a

faster pace and retail price hikes will become more widespread.

     Until wages and new retail prices for the next fiscal year are set, there

is not much new information on consumer prices, except that the prices for daily

necessities have been rising.

     The board will update its growth and inflation outlook in its quarterly

Outlook Report due out after the meeting next week. It is the last report before

the five-year term of BOJ Governor Haruhiko Kuroda ends on April 8, while those

of his two deputies end on March 19.

     --CPI FORECAST LITTLE CHANGED

     In light of continued global economic recovery, the board is expected to

consider slightly raising its median GDP forecast for fiscal 2018 from +1.4%

projected in October.

     But its median forecast for core CPI in fiscal 2018 is expected to be left

unchanged at 1.4% as consumer prices remain slow to respond to solid economic

growth.

     The board is likely to maintain the estimated timing of hitting the 2%

price stability target "around fiscal 2019."

     The national average core CPI (excluding fresh food) rose 0.9% on year in

November, the 11th straight year-on-year rise, with the pace of increase

accelerating slightly from +0.8% in October.

     But the core-core CPI (excluding fresh food and energy) rose just 0.3% on

year in November after rising 0.2% in each of the previous three months, showing

the recent increase in consumer prices has been led by higher fuel and utility

costs.

     Both BOJ and private-sector economists expect the base-year effect of

higher energy price on the CPI will wane gradually in coming months, exerting

downward pressure on prices.

     In addition, service prices, which account for about half of the CPI

basket, are slow to rise due to tough competition among retailers, a downward

bias in the calculation of imputed rents and government-regulated low wages for

caregivers.

     However, BOJ economists expect the recent rise in Dubai crude oil price to

above $65 a barrel from around $53 in October will push up electricity and gas

charges for households, albeit with a time lag, which in turn would support a

further rise in consumer prices.

     --INFLATION OUTLOOK EDGES UP

     The BOJ's quarterly consumer sentiment survey, released last week, showed

that the percentage of respondents expecting prices to rise in the next year

stood at 75.6% in December, up from 70.4% in September, while 1.9% said prices

would fall in the next year, unchanged from three months earlier.

     Looking five years ahead, 81.9% said prices would rise, up from 81.4% in

September.

     Given that inflation expectations have not shown a clear uptrend, the BOJ

board is expected to maintain its view in the Outlook Report that inflation

expectations have remained in a weakening phase.

     --OUTPUT GAP CONTINUES RISING

     The recent improvement in the domestic economy's output gap is expected to

increase upward pressure on consumer prices and inflation expectations with a

lag of a few quarters, but, as BOJ officials have repeatedly said, the stubborn

deflationary mindset among households and businesses is hampering higher

producer costs from being passed along to consumer prices.

     The positive output gap resulting from tighter supply and firmer demand

widened to 1.35 percentage points in the July-September quarter of 2017 from

1.18% points in April-June that year.

     It was the fourth straight quarter of the gap being in positive territory

and much higher than 0.69% points in January-March and 0.36% points in the final

quarter of 2016.

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

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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

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