MNI STAY OF PLAY: BOJ Board To Stand Pat; Keep Recovery View

--Despite Growing Headwinds, Modestly Expanding Economy Seen

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan Board meets next week and will likely leave

unchanged its baseline view that Japan's economy is expected to expand

moderately, MNI understands, despite growing downside risks as global

uncertainties pick up. 

     Policymakers will likely stand pat on monetary policy at their two-day

policy-setting meeting ending on Dec. 20 and they will not update their

medium-term economic growth and inflation outlook until the January 22-23 policy

meeting.

     With firms still cautious over hiking retail prices, Japan's inflation

rates remain slow to respond to the tight labor market conditions and high input

costs, but BOJ officials believe the momentum toward hitting the 2% price target

is maintained.

     --WEAK GLOBAL SIGNS

     The global economy is showing signs of slowing and BOJ economists are

focused on how the global economy evolves and how the impact of ongoing trade

frictions impacts Japan as 2019 unfolds.

     "Market players are more sensitive to weak spots than bright spots amid

concern over a slowdown in the U.S. economy, (a driving factor for the global

economy). This is reflecting that market players are worried about weaker global

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

     The person, however, added that significant worsening of the global economy

hasn't been observed and a worsening is mainly limited to soft data, such as

sentiment.

     BOJ officials continue to keep a close eye on how Japan's exports and

industrial production rebound in the current quarter and the first quarter of

2019 and how they have been influenced by sluggish global demand.

     Despite growing uncertainties over the global economy, the virtuous cycle

from profits to spending continues to work across Japan, BOJ officials view.

     However, the Board will examine the recent stock price fall as they are

concerned that fragile financial markets will weigh on economic sentiment and

slow spending plans, which in turn will undermine the virtuous cycle.

     The stable dollar/yen rate and the lack of the yen strength remains one

piece of good news for BOJ officials.

     --CAPEX TO SLOW

     Capital investment growth is likely to decelerate as pressure from cyclical

adjustments in capital stocks heightens and domestic demand slows, the BOJ

views. However, they expect Japan's economy to continue on an expanding trend in

fiscal 2019 and 2020, partly supported by external demand -- despite the global

slowdown.

     The International Monetary Fund in October lowered the global economic

growth forecast in 2019 and 2020 to both 3.7% from July's 3.9%. However, 3.7%

growth is still above the average 3.5% seen over the past 38 years.

     As long as the global economy grows around 3.7%, Japan's exports will be

supported by global demand and the economy will expand moderately, the BOJ

views.

     --BENCHMARK IMF VIEW

     Another person familiar with BOJ thinking said that the BOJ's global

economic view isn't based on the IMF forecast alone, but the IMF view is a

benchmark view for officials when predicting the global economy.

     The person added that if the IMF's global growth forecast was revised down

below 3.5%, it would further increase downside risks to the global and Japanese

economies, which in turn will prompt the BOJ to be more vigilant against

downside risks.

--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

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