REPEAT:MNI POLICY: BOJ Cuts CPI Outlook, Downside Risks Remain

     TOKYO (MNI) - In the face of a slow pickup in consumer prices, the Bank of

Japan board on Tuesday revised down its medium-term inflation projection, as

widely expected, repeating that downside risk to inflation are higher than

upside risks.

     In the bank's quarterly Outlook Report, the median forecast for the core

CPI (excluding fresh food) by the nine-member board was revised down to +1.1%

for fiscal 2018 from +1.3% projected in April.

     The median inflation forecast for fiscal 2019 was also revised down to

+1.5% from +1.8% made in April and that for fiscal 2020 was lowered to +1.6%

from +1.8%. The forecast excludes the direct impact of a sales tax hike to 10%

from 8% planned in October 2019.

     On the other hand, the median economic growth forecast for the current

fiscal year was revised down slightly to +1.5% from +1.6% made in April. The GDP

projections for fiscal 2019 and 2020 were left at 0.8%.

     The BOJ continues to see Japan's potential growth rate in a range of 0.5%

to 1.0%.

     --INFLATION EXPECTATIONS FLAT

     The board maintained its cautious view, repeating, "Inflation expectations

have been more or less unchanged."

     The inflation outlook among firms and households has bottomed out but it

has not shown a clear uptrend.

     "The year-on-year rate of change in the consumer price index (excluding

fresh food) has been positive but has continued to show relatively weak

developments compared to the economic expansion and the labor market

tightening," the BOJ said.

     "Reflecting such developments, a rise in medium- to long-term inflation

expectations has been lagging behind."

     The BOJ repeated its assessment, saying, "The momentum toward achieving the

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

     --SLOW PRICE ANALYSIS

     The bank blamed the mindset and behavior "based on the assumption that

wages and prices will not increase easily" for the slow progress in guiding

inflation to the 2% target from below 1%.

     Firms' cautious wage- and price-setting stances as well as households'

cautiousness toward price rises "have not yet clearly changed, and downward

pressure on prices stemming from intensifying competition has been strong in

some areas," the BOJ said.

     "The large room for firms to raise productivity, as well as technological

progress in recent years" are contributing factors to these developments, it

said.

     The BOJ repeated its risk analysis presented in April, saying, "With regard

to the risk balance, upside and downside risks to economic activity are

generally balanced in fiscal 2018, but risks are skewed to the downside for

fiscal 2019 onward."

     --NO OVERHEATING ACTIVITY

     The bank also repeated: "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."

     But it 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," it said.

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