MNI STATE OF PLAY: BOJ To Cut FY18 Infla Forecast; MonPol Unch

By Hiroshi Inoue

     TOKYO (MNI) - Following weaker than expected inflation outcomes in the

April-September period, the Bank of Japan board will likely slightly lower the

median inflation forecast when it meets On October 30/31, revising it downwards

from the 1.1% forecast in July, MNI understands.

     Despite the expected downward revision to the inflation rate forecast and

concern over disaster-driven weak economic activity in the third quarter, the

BOJ board will likely stand pat on monetary policy at the meeting.

     --2% MOMENTUM INTACT

     The board is likely to maintain the view that the momentum toward achieving

the 2% price target remains, as the output gap BOJ officials are focused has

been improving, although it lacks upward impetus.

     The board's median fiscal 2019 inflation rate forecast, starting next April

1, is also expected to be lowered from July's +1.5%.

     The impact of higher crude oil prices on the inflation rate will ease ahead

and, along with the weak current inflation record, will weigh on the inflation

forecast, known as "adaptive expectation formation."

     BOJ economists still maintain the view that consumer prices are improving

but prices are slow to respond to a moderate economic recovery and tight labor

market conditions.

     Bank economists also think the structural factors seen restricting price

rises in July continue, although some firms are now transferring higher costs on

to retail prices.

     --SOLID CAPITAL INVESTMENT

     The BOJ September Tankan survey showed that business sentiment had been hit

by an uncertain outlook for global demand and high costs, but firms maintained

their solid capital investment plans. Capital investment, along with production,

are regarded by BOJ officials as the key economic components of assessing the

state of the economy and its outlook.

     Bank officials don't expect the economy to deviate from the recovery path

in the near future, but they remain vigilant against the risks of an escalating

trade dispute spilling over to Japan's exports and economy.

     They are also concerned that volatile financial markets worsen business

sentiment, prompting firms delaying capital investment.

     --FLAT INFLATION EXPECTATIONS

     BOJ officials remain vigilant over the outlook for inflation expectations,

with expectations of both firms and households remaining sluggish on the back of

stubborn deflationary mindsets. They believe that the pick up in the pace of

inflation expectation will not accelerate unless real inflation rates rise on

the back of wage hikes.

     --GOBAL DEMAND INTACT

     The International Monetary Fund lowered the outlook for global growth to

3.7% for both 2018 and 2019, down from the 3.9% forecast in the April and July

World Economic Outlook releases, noting that "the balance of risks to the

short-term global growth forecasts has now shifted to the downside" and that the

chance of an upside surprise has diminished.

     The BOJ see growing downside risk but will likely maintain the view that

overseas economies have continued to grow on the whole, with no decisive

evidence seen of a worsening in global demand.

--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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