REPEAT:MNI INSIGHT: BOJ To Lower CPI Fcast, Keep Policy Stance

--BOJ Sees Output Gap, Labor Shortages To Push Up Prices

--But Many Japanese Firms Still Have Room To Absorb Higher Costs

By Hiroshi Inoue

     TOKYO (MNI) - At its July 30-31 policy meeting, the Bank of Japan board is

likely to lower its median inflation forecast for the current fiscal year to 1%

or slightly below from 1.3% made in April but an expected downward revision to

its 1.8% inflation outlook for fiscal 2019 will be smaller, MNI understands.

     Downward revisions to the inflation outlook are unlikely to prompt the

board to consider conducting additional monetary easing because the output gap,

a key factor for determining whether the momentum toward achieving the 2%

inflation target is intact, has been improving.

     The revision for fiscal 2018 will be simply in line with

weaker-than-expected consumer price data since the release of the bank's

quarterly Outlook Report in April.

     --FY19 CPI VITAL

     On the other hand, the expected downward revision to the fiscal 2019

inflation outlook will be limited as the board expects the mechanism of rising

consumer prices to strengthen during the fiscal year in a delayed reaction to

tighter production capacity and labor supplies.

     The expected downward revision to the fiscal 2018 inflation outlook does

not mean the board is becoming more pessimistic about guiding low inflation to a

stable 2% because BOJ officials are more focused on the price trend in fiscal

2019.

     However, if the board highlights structural issues that are restricting

price and wage gains, it may lead to a sharper downward revision for fiscal

2019, by more than 0.2 percentage point.

     --TRADE/DISASTER EFFECTS UNAVAILABLE

     BOJ policymakers are keeping a close eye on the impact of U.S. trade

disputes on global growth as well as that of the recent heavy rainfalls and mud

slides in southwestern Japan on production and consumption. The disaster killed

more than 200 people and destroyed many houses and roads, paralyzing supply

chain networks.

     Those factors have not caused a visible impact on exports or domestic

demand, another reason for an expected 'no change' in the BOJ's easing stance at

its July meeting.

     In addition to the quarterly update on the medium-term growth and inflation

outlook, the board will release its analysis of the slow response of consumer

prices to the improving output gap and tightening labor supply.

     The board is unlikely to cite any fresh factors for the slow pickup in

consumer prices and wages while BOJ economists are still reviewing the

phenomenon from a broad viewpoint.

     So far, the BOJ has blamed the stubborn deflationary mindset among

households and businesses for the slow price and wage rises. It has also noted

that firms are investing in automation to cope with labor shortages, keeping a

lid on upward pressures on prices.

     --IMPROVING OUTPUT GAP

     In theory, the improvement in the output gap should increase upward

pressures on consumer prices and inflation expectations with a lag of a few

quarters.

     Until recently, BOJ economists thought the sixth straight positive output

gap through Q1 and persistent labor shortages would prompt firms to raise wages

and retail prices at a much faster pace than seen in the past few years.

     --ABSORBING HIGHER COSTS

     However, neither consumer prices nor base wages have risen as much as BOJ

officials expected earlier.

     BOJ economists are analyzing that companies remain cautious about passing

higher costs onto retail prices for fear of losing market share, and that many

firms with record high profits still have ample room to absorb higher costs

without raising prices.

     The BOJ quarterly Tankan business survey for June showed that the ratio of

current profits to sales was the highest in over 10 years.

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