UPDATE: BOJ July Minutes: Slow Wage/Price Hikes Risk To 2% CPI

--BOJ Board Saw Economic Risks Skewed to Downside

--Adds Details From 7th Paragraph

     TOKYO (MNI) - Bank of Japan board members cautioned that a further delay in

the inflation outlook amid slow wage and retail price hikes would dampen actual

consumer price rises, noting risks to growth and inflation were skewed to the

downside, the minutes of the bank's July 19-20 policy meeting released Tuesday

show.

     Regarding the longer-term price outlook, members concurred that "there was

a risk that a rise in inflation expectations would lag further behind if it took

time for firms' stances to shift toward raising wages and prices and inflation

consequently remained relatively sluggish."

     Due to this and other factors, including the uncertainty over global

growth, the board "shared the recognition that risks to Japan's economic

activity and prices were skewed to the downside."

     On the conduct of monetary policy, the minutes said "most members shared

the recognition that, although it was necessary to carefully examine the fact

that firms' wage- and price-setting stances remained cautious, the momentum

toward achieving the 2% stability target was being maintained."

     At the July meeting, the BOJ board decided to leave its monetary policy

unchanged in a seven-to-two vote, retaining the yield curve control target it

adopted in September last year, while pushing back its estimate for achieving

its 2% inflation target by a year until "around fiscal 2019." It was the sixth

delay since the bank began aggressive easing in April 2013.

     In its quarterly Outlook Report released after the meeting, the BOJ board

continued to revise up slightly its economic growth forecast for the next two

years on firmer global demand but revised down its projection for inflation

through fiscal 2019 as the pace of increases in wages and retail prices remain

slow.

     On the positive side, "Many members shared the view that, given that there

naturally seemed to be a limit to firms' ability to absorb labor costs amid the

continued tightening of labor market conditions, firms were likely to gradually

shift their stances toward raising wages and prices."

     Some firms are gradually passing on higher costs to prices while others are

cautious about raising prices for fear of losing market share, or even offering

discounts to lure customers.

     "A few members said that, although labor market conditions had been

tightening steadily, the unemployment rate and the output gap had not reached

the levels seen during the bubble period [of the late 1980s]."

     "These members continued that, in order to achieve the price stability

target of 2%, it was important that these indicators improve further."

     The BOJ estimates Japan's positive output gap widened to +0.79% in the

January-March quarter from +0.57% in October-December of 2016, staying in

positive territory for the third straight quarter.

     But this is still small compared to the gap of around 6% seen in 1991 just

after the asset bubble burst.

     The minutes showed that there was a cautious view among the board as to

whether tightening labor conditions would lead to higher wages and prices.

     "One member pointed out that Japanese firms in the services sector, which

face large disparities in labor productivity with U.S. firms, still had

considerable room for a further increase in productivity through a streamlining

of their business processes; therefore, it would take time before the tightening

of labor market conditions led to rises in wages and prices."

     "In response, a different member noted that it was highly possible that

Japanese firms' price-setting stances would change even before they could reduce

disparities in labor productivity with U.S. and European firms," the minutes

said.

     Another member pointed out that Japanese firms - which had been force to

adapt to the deflationary environment for a long time - had no choice but to

transform their business models to ensure survival, with labor shortages

becoming more acute.

     The same member said the conditions for a change in the social norm were

being put in place toward a rise in prices."

--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

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