REPEAT: MNI: BOJ Off'l: 2% CPI May Need More Time After FY19

Repeats Story Initially Transmitted at 08:42 GMT Nov 28/03:42 EST Nov 28

By Hiroshi Inoue and Max Sato

     TOKYO (MNI) - It may take more time beyond the Bank of Japan's current

timeframe of "around fiscal 2019" before the central bank can anchor inflation

around 2% amid high uncertainties over the pace of productivity gains, price

rises and wage hikes, the BOJ's chief economist told Market News International.

     In an exclusive interview with MNI on Monday, Toshitaka Sekine,

director-general of the BOJ's Research and Statistics Department, also said he

is confident about the sustainability of Japan's current modest economic

recovery.

     In October, weak price data prompted the BOJ policy board to lower its

projections for consumer prices in fiscal 2017 and 2018, but the BOJ stuck to

its estimate that it could achieve its 2% inflation target "around fiscal 2019"

ending in March 2020. That estimate had been delayed by one year in July, the

sixth delay in the inflation target date since the BOJ began its very

accommodative easing policy in 2013.

     Downside risks to prices are high and thus "it may take some more time"

beyond the current target date before the 2% price stability target is achieved,

Sekine said. "We acknowledge that," he said.

     Sekine said there hasn't been much change in the BOJ's baseline scenario

for economic activity from the one provided in the bank's semi-annual Outlook

Report released on Oct. 31 as not many new indicators have been released since

then.

     Data released on Nov. 15 showed Japan's economy for the July-September

quarter posted a modest 0.3% rise on quarter, or an annualized 1.4%, as a

rebound in net exports offset a slump in consumer spending caused by bad

weather.

     The BOJ board expects the moderate economic expansion to continue as demand

from overseas is expected to remain firm while capital investment remains strong

and private consumption resilient.

     "We don't think the economy will run out of steam," Sekine said.

     Favorable economic developments will continue "for the time being" but the

BOJ is paying close attention to both upside and downside risks to economic

activity, he said.

     The BOJ will analyze how the risks to growth and inflation have changed in

making the next set of forecasts for the central bank's next Outlook Report, due

Jan. 23, he added.

     Despite the possibility that it will take longer than now expected to reach

the 2% inflation target, Sekine was cautiously optimistic about the consumer

price outlook.

     He pointed to slightly brighter signs in consumer price data, which have

shown prices for durable goods and services have been rising gradually.

     The recent rise in durable goods prices reflects the pass-through of past

yen depreciation while some companies are hiking prices as they hit the limit

for raising productivity, he explained.

     But he added: "We have to acknowledge that there is a high uncertainty as

to how much the recent price rise will accelerate."

     Lack of substantial wage growth remains the biggest stumbling block to an

acceleration of prices, Sekine indicated.

     But he also pointed out that real compensation per employee rose 1.6% on

year in the July-September quarter, a sign that household income is increasing

and thus should support consumer spending.

     This piece of data is stronger than the Monthly Labour Survey, which showed

average wages have been sluggish due to the recent fast pace of increase in

lower-paid part-time workers. Total monthly average cash earnings per regular

employee rose 0.9% on year in September, the second straight year-on-year rise,

but continued to mark a slight drop from a year before after adjustment for

inflation.

     "In our analysis, base wages tend to be influenced by past consumer prices

and productivity," Sekine said.

     He noted that the core consumer price index (excluding fresh food) rose

0.4% on average from a year earlier in the first nine months of 2017, well above

the average drop of 0.3% for the whole of calendar 2016.

     The fact that current prices are higher than those seen last year should

have a positive effect on company's base wage decisions for fiscal 2018, which

will start in April, he said.

     "In addition, corporate profits are at record highs. Judging from these

factors, it is conceivable that [the pace of] wage hikes will increase next

year," Sekine said.

     At this point, Japan has a negative gap between real wages and

productivity, meaning wage growth is lower than productivity gains. BOJ

officials believe the current weakness in inflation due to the negative real

wage gap is a temporary phenomenon but they do not know precisely how long it

will take to close the gap or how temporary the phenomenon will be.

     But there is a limit to what firms can do to make their operations more

efficient. Already, labor shortages are prompting restaurant and retail chains

to offer better working conditions including higher pay to secure necessary,

high-quality workers.

     Wages are influenced by productivity, so in the long run, real wage

increases will move in line with labor productivity, Sekine predicted.

     Assuming the U.S. is at the forefront of technological progress, experts

see Japan's labor productivity at 60% to 70% of the U.S. level, he said.

     Still, there is ample room for Japan to further increase its productivity

even as inflation accelerates, Sekine said. "We don't need to think that prices

in Japan won't rise until Japan's overall productivity catches up with that of

the U.S."

     In October the BOJ released a new cost-push indicator in an attempt to

gauge the pressure from corporate costs that have not been passed on to consumer

prices. The index showed upward pressure on consumer prices is increasing.

     The BOJ estimates the latest cost-push indicator stood at around 0.4% in

August, which means Japanese consumer prices are expected to rise by 0.4

percentage point in about two to three quarters.

     Therefore, the year-on-year increase in the core-core CPI (excluding fresh

food and energy) is expected to pick up from 0.2% in September to 0.7% in six

months, the central bank said. (The figures are all rough estimates.)

     While a hopeful sign, it is unclear how the index will evolve in the

future, Sekine said. "I would like to see its performance further."

     At some point, the BOJ may need to improve the index and the BOJ hasn't

decided whether to release the index regularly, he said.

     Sekine also pointed to what he and other officials hope is the start of a

rise in optimism among the Japanese, given that Japan's economic outlook is

better than many think.

     Japan's decades-long economic stagnation, coupled with the changing demands

of its rapidly aging population and fear about external threats, have caused

deep pessimism among the Japanese public, one reason BOJ officials point to in

explaining sustained business and consumer caution on spending.

     To help break up this pessimistic thinking and improve the economic

outlook, the government needs to follow through on its promises to implement

structural reforms and the private sector must invest in innovative areas to

raise the economy's growth potential, Sekine said, echoing the sentiment

expressed by many economists.

     Still, Japanese attitudes may already be turning the corner, Sekine said.

     "Japan is at the stage of regaining confidence gradually," Sekine said.

"The message in the speech by (BOJ) Deputy Governor (Hiroshi) Nakaso is that

Japan's potential is bigger than you might think."

     Nakaso said in London on Oct. 5: "Looking back at the policy responses,

although there were successes, I have to admit that there were also shortfalls,

as well as a couple of false dawns. But we have learned some lessons. This time

around, there seem to be more reasons to believe that the true dawn is near."

     "When the morning light arrives, we will know that after a long night the

sun also rises, when hopefully we can see more visibly that the Japanese economy

is back on track toward strong, sustainable and balanced growth," Nakaso said.

--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 BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com