REPEAT: MNI: BOJ Faces Policy Challenge From Apr Fcasts

Repeats Story Initially Transmitted at 08:05 GMT Dec 13/03:05 EST Dec 13

--Lower Inflation Forecasts Through 2021 Could Trigger Further Easing Debate

By Hiroshi Inoue

     TOKYO (MNI) - The still slow pick-up in domestic consumer prices, along

with falling crude prices and lower costs for mobile phone plans for next year

are looking troublesome for the Bank of Japan as it continues the fight to hit

the 2% inflation target, MNI understands.

     Bank officials are increasingly of the view that the BOJ will revise down

median inflation forecasts in coming years and the 2% price target will not be

achieved in fiscal 2021.

     Back in April, the BOJ dropped its timeframe for when the 2% price target

could be achieved (interpreted at the time as a signal the bank may need

additional easing) and, instead of a set calendar target, the BOJ now aims at

achieving the 2% price target at the earliest possible time. Some BOJ board

members have indicated that the 2% price target will be achieved in fiscal 2021

     --FY2021 - 2% KEY

     In April 2019, the BOJ board will release the medium-term outlook for

economic growth and inflation rates until fiscal 2021. Weak consumer prices and

a weaker outlook will likely prompt the BOJ to revise down the median forecast

of 1.5% for 2020. That, in turn, will make it difficult for the BOJ to predict

the median inflation forecast of 2.0% for fiscal 2021.

     Such a view will appear inconsistent with the BOJ stance of achieving the

well-stated aim of achieving the 2% price target at the possible earliest time,

increasing pressure on the BOJ to conduct further easy policy.

     However, the momentum toward the 2% price target based on a positive output

gap,  if maintained, will prevent the BOJ from conducting more easing.

     The BOJ will also be extremely cautious over extending easy policy further

and increasing side effects that are already causing unease at the central bank.

     If Japan's economy was set to fall into recession, the BOJ would, without

hesitation, conduct further easing -- lowering short- and long-term policy

rates, expanding the asset purchase and accelerating the increase of the

monetary base -- as outlined by the BOJ in September 2016, when it announced its

comprehensive assessment of monetary easing.

     --OUTPUT GAP VITAL

     BOJ Governor Haruhiko Kuroda has said, "It is important to maintain a

positive output gap -- a driver for a rise in inflation -- for as long as

possible."

     "It has been taking time to achieve the 2% price target. In such a

situation where economic and price developments have been somewhat varied, it

has become necessary to persistently continue with powerful monetary easing

while considering both the positive effects and side effects of monetary policy

in balanced manner," Kuroda added.

     Momentum toward the 2% price target is mainly determined by the output gap

and medium- to long-term inflation expectations.

     The BOJ continues to say, "Inflation expectations have been more or less

unchanged," but a drop in expectations caused by weaker consumer prices would be

a concern for BOJ officials.

     Japan's estimated positive output gap, resulting from tighter supply and

firmer demand, widened to 1.86 percentage points in the April-June quarter, up

from 1.63 percentage points in January-March, marking the seventh straight

quarterly rise.

     A downtrend for the output gap would be a crucial factor for BOJ officials,

although they don't expect the output gap to fall into negative territory unless

the economy is hit by a large shock.

--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