REPEAT: MNI: BOJ Keeps Policy Target, Sees 2% CPI Around FY19

     TOKYO (MNI) - The Bank of Japan board decided Tuesday in an 8-to-1 vote to

maintain its current monetary easing stance under the yield curve control

framework it adopted in September in 2016.

     No change in monetary policy was widely expected. The BOJ believes large

monetary stimulus is still needed to guide below 1% inflation toward its 2%

price stability target.

     The BOJ board also maintained its medium-term growth and inflation

projections, repeating what many see as an optimistic outlook that the bank can

hit the inflation target "around fiscal 2019."

     "With regard to the risk balance, upside and downside risks to economic

activity are generally balanced, and risks to prices are skewed to the

downside," the BOJ said in its quarterly Outlook Report, repeating its previous

assessment.

     The report showed the board's median forecasts for the core CPI (excluding

fresh food) were +0.8% for fiscal 2017, +1.4% for fiscal 2018 and +1.8%

(excluding the direct impact of tax changes) for fiscal 2019, all unchanged from

three months ago.

     The median forecasts for GDP growth were also unchanged at +1.9% for the

current fiscal year, +1.4% for the next fiscal year and +0.7% for the year

ending in March 2020.

     The planned sales tax hike to 10% from the existing 8% in October 2019 is

widely expected to dampen private consumption at the same time as business

investment runs its course, but external demand is likely to support growth, the

BOJ said, repeating its recent projection.

     The BOJ left its estimate of Japan's potential growth rate unchanged in a

range of 0.5% to 1.0%.

     On the public's price outlook, the board slightly upgraded its assessment,

saying, "Inflation expectations have been more or less unchanged." Previously,

it said, "Inflation expectations have remained in a weakening phase."

     The BOJ maintained its cautious view, saying the momentum toward achieving

the 2% price target is maintained but that it is not yet sufficiently firm.

     The board maintained is near-term price outlook, saying, "The year-on-year

rate of change in the CPI is likely to continue an uptrend and increase toward

2%, mainly on the back of the improvement in the output gap and the rise in

medium- to long-term inflation expectations."

     "Japan's economy is expanding moderately, with a virtuous cycle from income

to spending operating," the BOJ said, repeating its recent assessment. It also

said the economy is likely to continue its moderate expansion.

     As for the conduct of monetary policy, the BOJ repeated it would make

policy adjustments as appropriate, "taking account of developments in economic

activity and prices as well as financial conditions, with a view to maintaining

the momentum toward achieving the price stability target."

     "Examining financial imbalances from a longer-term perspective, there is no

sign so far of excessively bullish expectations in asset markets or in the

activities of financial institutions," the BOJ said in the report.

     At the same time, the bank also warned, "Prolonged downward pressure on

financial institutions' profits under the continued low interest rate

environment could create risks of a gradual pullback in financial intermediation

and of destabilizing the financial system."

     "However, at this point, there risks are judged as not significant, mainly

because financial institutions have sufficient capital bases."

     Under the yield curve control framework, the BOJ is seeking to stabilize

the 10-year government bond yield, the benchmark for long-term borrowing costs,

at around zero percent and keep the overnight interest rate at -0.1%.

     Board member Goushi Kataoka, who joined the board in July, dissented for

the fourth straight meeting, although he didn't formally propose any specific

policy action.

     Instead, Kataoka's comments were included in footnotes in the bank's policy

statement issued after the board's two-day meeting.

     Kataoka voted against maintaining the monetary policy target. He also

opposed the description of the board's inflation outlook.

     He was quoted in the statement as saying that if there was a delay in the

timing of achieving the price stability target due to domestic factors, the BOJ

should take additional easing measures and that it was necessary to include that

in the text.

     He also said the BOJ should try to hit the inflation target "in fiscal

2018," and that it was appropriate for the BOJ to purchase JGBs "so that yields

on JGBs with maturities of 10 years and longer would broadly be lowered

further."

     The BOJ's asset purchases, which are not the main policy target any longer,

will be maintained at the current pace. The outstanding amount of its JGB

holdings will increase about Y80 trillion annually, but the pace has slowed in

light of the recent drop in yields.

     The annual pace of purchases of other assets will also be maintained at Y6

trillion for exchange-traded funds (ETFs), Y90 billion for Japan real estate

investment trusts (J-REIT), Y2.2 trillion for commercial paper and Y3.2 trillion

for corporate bonds.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com