MNI STATE OF PLAY: BOJ To Keep Policy Target; Risks Growing

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan board will maintain its monetary easing

target at its Sept. 18-19 policy meeting, even though they are more concerned

about downside risks to a continued modest domestic economic recovery amid the

uncertainty over global demand, MNI understands.

     That's because BOJ officials haven't seen any data suggesting Japan's

economy is deviating from the recovery track, financial markets remain calm and

a slowdown in emerging economies is limited.

     The board is expected to maintain the official view that Japan's economy is

"expanding moderately, with a virtuous cycle from income to spending operating."

     --GLOBAL VS. DOMESTIC

     "Uncertainty over the outlook for global demand is increasing. But it is

premature to judge whether the underlying trend of the economy has changed as

economic data, such as exports and production, hasn't shown the trend has

worsened," a person who is familiar with BOJ thinking said.

     The person added that both exports and industrial production for July were

sluggish, but it is difficult to judge whether they were mainly caused by a

worsening of global demand because they were also dampened by bad weather during

the month.

     Industrial production fell 0.1% on month in July, coming in weaker than the

MNI median economist forecast of +0.3% and posting the third straight

month-on-month drop after -1.8% in June.

     Heavy rains that hit southwestern Japan caused a parts supply shortage and

a distribution network breakdown, leading to a decline in output of transport

equipment and production machinery.

     As a key indicator of external demand, the BOJ's real export index rose

0.3% on month in July for the first rise in three months following -0.5% in

June, but the index fell 1.5%, compared to the average of the April-June

quarter.

     --EXPORTS, PRODUCTION, TANKAN

     Another person who is familiar with BOJ thinking said that the focus is on

how exports and industrial production will evolve in the coming months to

predict growth and inflation.

     The person added that the next key indicator is the BOJ's quarterly Tankan

business survey for September due out on Oct. 1 to gauge whether sentiment,

capital investment plans and sales have been affected by the U.S.-China trade

dispute and other factors.

     BOJ economists will continue gathering information and will analyze the

outlook for growth and inflation ahead of the bank's policy meeting on Oct.

30-31, when the BOJ releases its quarterly medium-term Outlook Report.

     --GROWTH TURNING POINT

     Some BOJ officials believe the domestic economy may be at a turning point

toward a slowdown from a sustained, modest recovery track, which can only be

confirmed months later.

     Japan's economic recovery has been mainly driving by global demand as well

as capital investment.

     Should the global economy slow down, firms would refrain from implementing

capex and Japan's economy would lose stream, which in turn would undermine the

momentum toward the bank's 2% inflation target.

     BOJ officials have warned that if the volatility in the global financial

markets increases and the slowdown spreads to more emerging economies, downward

pressure on Japan's economy would be intensified.

--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

[TOPICS: MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]