MNI STATE OF PLAY: BOJ To Keep Easing Stance, Eye Wages

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan board is expected to maintain its monetary

easing target at its two-day meeting ending Friday as the economy seems to be

weathering volatile financial markets, MNI understands.

     The decision is likely to be made in an 8 to 1 vote, with board member

Goushi Kataoka seen dissenting for the fifth straight meeting after taking

office in July. He has argued that additional easing is necessary to achieve the

2% inflation target at an early stage.

     The board believes that despite the recent global stock market sell-off and

the appreciation of the yen, the virtuous circle from higher corporate profits

and investment to firmer income gains and household spending remains intact.

     The BOJ is set to keep the shape of the nearly flat bond yield curve (-0.1%

overnight and around 0% in the 10-year zone) for some time to come because the

increase in consumer prices remains slow amid the sustained, moderate economic

recovery.

     --ANNUAL WAGE TALKS

     After this week's BOJ meeting and governor remarks, the focus is on the

response from major firms on March 14 to labor union demands for wage hikes and

better working conditions for fiscal 2018 starting in April. The results will

set the tone for wages paid to people working for smaller firms.

     If wage hikes remain slow amid uncertainty over financial markets and world

trade, the prospects for a steady rise in consumer prices will become dim.

     If the year-on-year increase in the core CPI (excluding fresh food) does

not accelerate after rising above 1.0%, the BOJ board may have to revise down

its latest median inflation forecast of +1.4% for fiscal 2018.

     --2% CPI TIMEFRAME

     That could prompt the board to consider pushing back the estimated timing

of achieving the 2% inflation target again from "around fiscal 2019" at the next

key policy meetings in April or July, when the bank releases its quarterly

Outlook Report.

     The report due after the April 26-27 meeting will show the board's new

three-year projections for growth and inflation through fiscal 2020 ending in

March 2021.

     The pace of increase in consumer prices has been slower than BOJ economists

predicted in January but the momentum toward achieving the 2% price target is

maintained, BOJ officials view.

     The annual inflation rate measured by the core national average CPI is

expected to rise in February from +0.9% in January, judging from a rise in the

Tokyo CPI to +0.9% in February from +0.7% the previous month, although it was

led by a temporary surge in the costs for hotels and overseas holiday tours.

     BOJ economists believe Japan's economic trend has been largely moving along

the main scenario they drew in January: the output gap continues improving,

firms are gradually passing higher costs onto retail prices and consumers are

accepting higher prices.

     --CPI AFTER MAY

     However, they are also aware that it will take some time before retail

price hikes spread throughout the economy and appear in CPI data.

     They are monitoring whether the core CPI can maintain its gradual uptrend

after May, when the price-boosting effects of the past depreciation of the yen

through import costs and year-on-year gains in energy prices will fade.

     The Consumer Confidence Survey showed that the public's inflation

expectations for 12 months ahead marked the first drop in seven months as the

impact of a spike in fresh food prices has eased. The share of those projecting

price rises decreased to 81.3% in February from 82.4% in January. The share of

respondents forecasting lower prices increased to 4.0% from 3.2%, the first rise

in two months.

--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

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