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MNI (London)
Repeats Story Initially Transmitted at 04:15 GMT Oct 22/00:15 EST Oct 22
By Hiroshi Inoue
     TOKYO (MNI) - Following weaker than expected inflation outcomes in the
April-September period, the Bank of Japan board will likely slightly lower the
median inflation forecast when it meets On October 30/31, revising it downwards
from the 1.1% forecast in July, MNI understands.
     Despite the expected downward revision to the inflation rate forecast and
concern over disaster-driven weak economic activity in the third quarter, the
BOJ board will likely stand pat on monetary policy at the meeting.
     --2% MOMENTUM INTACT
     The board is likely to maintain the view that the momentum toward achieving
the 2% price target remains, as the output gap BOJ officials are focused has
been improving, although it lacks upward impetus.
     The board's median fiscal 2019 inflation rate forecast, starting next April
1, is also expected to be lowered from July's +1.5%.
     The impact of higher crude oil prices on the inflation rate will ease ahead
and, along with the weak current inflation record, will weigh on the inflation
forecast, known as "adaptive expectation formation."
     BOJ economists still maintain the view that consumer prices are improving
but prices are slow to respond to a moderate economic recovery and tight labor
market conditions.
     Bank economists also think the structural factors seen restricting price
rises in July continue, although some firms are now transferring higher costs on
to retail prices.
     --SOLID CAPITAL INVESTMENT
     The BOJ September Tankan survey showed that business sentiment had been hit
by an uncertain outlook for global demand and high costs, but firms maintained
their solid capital investment plans. Capital investment, along with production,
are regarded by BOJ officials as the key economic components of assessing the
state of the economy and its outlook.
     Bank officials don't expect the economy to deviate from the recovery path
in the near future, but they remain vigilant against the risks of an escalating
trade dispute spilling over to Japan's exports and economy.
     They are also concerned that volatile financial markets worsen business
sentiment, prompting firms delaying capital investment.
     --FLAT INFLATION EXPECTATIONS
     BOJ officials remain vigilant over the outlook for inflation expectations,
with expectations of both firms and households remaining sluggish on the back of
stubborn deflationary mindsets. They believe that the pick up in the pace of
inflation expectation will not accelerate unless real inflation rates rise on
the back of wage hikes.
     --GOBAL DEMAND INTACT
     The International Monetary Fund lowered the outlook for global growth to
3.7% for both 2018 and 2019, down from the 3.9% forecast in the April and July
World Economic Outlook releases, noting that "the balance of risks to the
short-term global growth forecasts has now shifted to the downside" and that the
chance of an upside surprise has diminished.
     The BOJ see growing downside risk but will likely maintain the view that
overseas economies have continued to grow on the whole, with no decisive
evidence seen of a worsening in global demand.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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