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MNI STATE OF PLAY: BOJ To Keep Policy Target; Weak CPI A Risk

By Hiroshi Inoue
     TOKYO (MNI) - Slow consumer price gains continue to disappoint Bank of
Japan board members and officials but the board is set to maintain its bond
yield targets this week as the momentum toward hitting the 2% inflation target,
although weak, remains intact, according to sources familiar with the BOJ's
policy-making process.
     Consumer prices remain slow to respond to the modest economic recovery as
upward pressure from the improving output gap and tight labor market conditions
hasn't grown as much as the BOJ predicted earlier.
     However, BOJ officials believe the mechanism of gradual gains in wages and
retail prices amid labor shortages and the positive output gap remains intact
and that it will strengthen.
     "Consumer prices in April and May haven't risen due mainly to temporary
factors, such as the impact of the yen's rise (that lowers import costs) and a
slower rise in mobile phone prices. But the mechanism of rising inflation
continues working," a person who is familiar with BOJ thinking said.
     The person added that the BOJ needs to examine whether the recent weak
prices have been affected by not only temporary but structural factors.
     BOJ officials expect the economy to rebound in April-June after what many
see as a temporary contraction in January-March. They also believe upward
pressure on consumer prices will pick up gradually.
     At the same time, board members will closely examine the slow response of
prices to a tighter supply of production capacity and labor at their two-day
meeting ending Friday.
     The BOJ is likely to incorporate the results of its analysis in the
medium-term growth and inflation projections in the quarterly Outlook Report due
after the July 30-31 policy meeting.
     BOJ officials were encouraged by the latest development in the service
producer price index, which rose 0.9% on year in April, up from +0.5% in March.
     In Japan, companies tend to revise their prices in April and October.
     SPPI showed that service prices charged to companies picked up at the start
of fiscal 2018 while CPI for April showed the pace of service price rises at the
retail level remained slow at +0.3% on year, compared to +1.3% in goods prices
excluding volatile fresh food.
     But the SPPI data still supports the BOJ view that labor shortages and
rising costs are increasing pressure on firms to raise retail prices, another
person who is familiar with BOJ thinking said.
     The person, however, noted that consumer price gains remain slow, below 1%,
as prices for durable goods haven't risen and companies remain cautious about
raising retail prices amid sluggish private consumption.
     BOJ officials are focused on the quarterly Tankan business survey due out
on July 2 to gauge how output prices have developed and higher energy costs have
hurt sentiment.
     A third person who is also familiar with BOJ thinking said, "Short-term
inflation expectations are rising but medium- to long-term inflation
expectations -- the BOJ's main focus -- haven't risen."
     The person added that it takes more time for actual prices to rise and
influence longer-term expectations.
     The output gap has been improving but its impact on corporate price hikes
has been limited as firms are worried that higher prices will hurt sales.
     As long as the economy continues recovering, the output gap will continue
improving, which in turn should support wage and price hikes, the key step
toward higher consumer prices.
     Higher consumer prices should raise longer-term inflation expectations,
although there is uncertainty over how close the correlation is and how long it
takes for CPI to affect people's inflation outlook.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:
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