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Japan Central Bank to Weigh Unpredictable Factor at Meeting: Trump

29 Jan 2017 12:00 pm
By Takashi Nakamichi 

TOKYO -- At the Bank of Japan, cautious optimism toward U.S. President Donald Trump is giving way to plain caution.

Mr. Trump's election victory initially gave policy makers in Tokyo hope of more-favorable economic conditions after a stimulus pledge sparked a sharp rise in the U.S. dollar and a stock market rally amid expectations of faster American and global growth.

But now, ahead of a two-day policy meeting starting Monday, he is talking away the feel-good factor for Japan. Mr. Trump's recent comments questioning the dollar's strength, Japan's alleged nontariff barriers on American cars and the country's trade surplus with the U.S. are evoking Japanese memories of fierce trade friction with Washington in the 1980s and 1990s.

Officials from Japan's central bank are increasingly unsure whether Mr. Trump's protectionist measures will outweigh the benefits of his pledged efforts to stimulate the U.S. economy, say people close to the bank.

"We now realize that we know very little about him," said one of those people.

Officials have suggested there will be no rate changes at the meeting, which will likely instead focus on whether the BOJ changes its price forecast for the fiscal year ending March 2018, the people said. Investors will scrutinize the meeting for signs of whether the bank will raise rates later this year, a move that risks stunting Japan's fragile recovery.

At the meeting, Japanese central bank officials are likely to discuss Mr. Trump's oft-contradictory policy statements and tweets, the people said. Nervous about his unpredictably, many officials are wary of raising inflation projections despite some good economic reasons to do so, they said.

The BOJ currently tips inflation at 1.5% in the year through March 2018, nearly double private economists' average. The bank's goal is 2% inflation. Inflation has consistently undershot the BOJ's forecasts since Gov. Haruhiko Kuroda took office in spring 2013.

"If the BOJ revises up the forecast this time, that would likely stoke talk in the markets that Japan may move toward raising interest rates despite these very uncertain, unpredictable times," one of the people said.

That kind of speculation could gain momentum and drive up the yen, making the BOJ move self-defeating, this person said. Adding to anxiety among bank officials is investors' tendency to seek refuge in the yen at times of strong uncertainty.

Data released Friday showed consumer prices fell 0.2% in December, a smaller decline than the previous month. Some economists expect the reading to turn positive in January. That would be the first positive reading since December 2015.

A stronger currency can put downward pressure on prices through cheaper imports and penalize Japanese exporters, whose goods would be more costly abroad.

The hand-wringing over whether to raise the price forecast underlines the far-reaching effects of Mr. Trump's words and deeds on Japan's policy debate.

In the wake of Mr. Trump's attack on Japan's trade openness and its military dependency on the U.S., Prime Minister Shinzo Abe pledged efforts on Wednesday to strengthen the nation's military capability and boost Japanese investment in the U.S.

Mr. Abe also said he was willing to consider bilateral trade negotiations with the U.S. following Mr. Trump's decision to pull out of a trade pact among 12 Pacific Rim nations including Japan.

Some of Japan's biggest companies, including Toyota Motor Corp., have also acted quickly to publicize their commitment to investing in the U.S. and creating jobs there following criticism from Mr. Trump.

Despite the uncertainty over how international trade and the global economy might be affected by the Trump administration, some on the BOJ's nine-member board think an upward revision of the price forecasts is warranted, considering the yen's drop and Japan's economic pickup since Nov. 1, when the previous outlook was released, the people said.

The bank is indeed set to raise its economic growth projections for this year and next from 1% and 1.3%, according to Mr. Kuroda.

But other members and many BOJ staff are taking a warier stance given the renewed uncertainty stemming from Mr. Trump's comments and the possibility that a revision would draw too much media attention, fueling talk of tightening, according to the people.

A price-forecast increase for any year would be the first since January 2015.

While the possibility of a small raise in the price forecast can't be ruled out, "you shouldn't do what you don't need to do," another person close to the bank said.

Write to Takashi Nakamichi at takashi.nakamichi@wsj.com

(END) Dow Jones Newswires

January 29, 2017 07:00 ET (12:00 GMT)

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