REPEAT: MNI: BOJ Needs More Than Wider Output Gap For CPI Rise

Repeats Story Initially Transmitted at 07:47 GMT Jan 9/02:47 EST Jan 9

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan's latest estimate of the output gap of the

domestic economy showed further improvement Tuesday, which will help lift below

1% inflation, but the bank needs much higher inflation expectations to achieve

its 2% price target, MNI understands.

     The positive output gap resulting from tighter supply and firmer demand

widened to 1.35 percentage points in the July-September quarter of 2017 from

1.18% points in April-June that year.

     It was the fourth straight quarter of the gap being in positive territory

and much higher than 0.69% points in January-March and 0.36% points in the final

quarter of 2016.

     The improvement in the output gap is expected to increase upward pressure

on consumer prices and inflation expectations with a lag of a few quarters.

     --NEED MORE THAN WIDER GAP

     BOJ officials think a continuous improvement in the output gap is a

necessary condition for guiding low inflation to the bank's 2% price stability

target but is not a sufficient condition.

     They have also said people will have to respond more to the current modest

but sustained economic recovery and expect higher prices ahead in order for

inflation to pick up at a faster pace.

     In its quarterly Outlook Report released in October, the BOJ said "medium-

to long-term inflation expectations are projected to rise as firms' stances

gradually shift toward raising wages and prices with an improvement in the

output gap continuing."

     But it also warned that some items in the CPI basket --

government-regulated fees, some service costs and rents -- are not particularly

responsive to the output gap.

     There is concern that the continued slow responses of those items "may

continue to constrain the acceleration of CPI inflation," the BOJ said.

     --GROWTH POTENTIAL STILL LOW

     The BOJ's estimate of the output gap, which is based on capital and labor

stocks, was wider than the Cabinet Office's latest estimate at 0.7%, a figure

based on revised Q3 GDP growth of an usually strong 0.6% on quarter, or an

annualized +2.5%.

     The BOJ also said Tuesday that Japan's potential growth rate for the first

half of fiscal 2017 was estimated to be 0.85%, up slightly from 0.83% in the

second half of fiscal 2016. It was within the bank's latest estimate in a range

of 0.5% to 1.0% released in the October Outlook Report.

     The Cabinet Office estimates Japan's potential growth rate to be about 1.1%

in the July-September quarter, unchanged from the previous quarter.

     Private-sector economists forecast the economy will grow at an annualized

pace of just above 1% in coming quarters but expect the core consumer price

index (excluding volatile fresh food) to rise only about 1% in each of fiscal

2018 and 2019, far below the central bank's 2% target. 

--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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com