— Adds Comments From Briefing in Paragraphs 4-8

KUMAMOTO, Japan (MNI) – Bank of Japan board member Sayuri Shirai on
Thursday warned that downside risks to a recovery from the current economic
slump and years of deflation are greater than upside risks.

In a speech to business leaders here, Shirai said, “I would like to touch
on risk factors concerning the outlook for economic activity. While both upside
and downside risks exit, I personally assess the downside risks as greater.”

“Regarding the risks concerning the outlook for prices, I also assess that
the risk balance is titled to the downside, while the BOJ’s projection could
deviate either upward or downward.”

Later she told a news conference, “Overseas economies remain in a
deceleration phase and Japan’s economy has been weakening somewhat. But the
recent weakness in economic activity and prices are within our forecast
presented at the October (30th) policy meeting.”

But she added, “The BOJ must pay attention to downside risks to Japan’s
economic activity and prices and keep a close eye on whether the downside risks
will materialize.”

The BOJ must maintain its monetary easing policy because the prospects for
achieving the bank’s 1% inflation goal in fiscal 2014 have not emerged yet, she
said, repeating the BOJ’s official line.

On downside risks, Shirai said, “Both exports and industrial production
have dropped. Firms appeared to be postponing their capital investment plans and
I’m paying attention to how long this development will last.”

Shirai said that she is personally focused on whether consumer sentiment
will worsen, which in turn will affect private consumption.

Shirai didn’t discuss whether the BOJ needs to conduct further easing now
but said, “Financial conditions in Japan have been accommodative, as the BOJ
continuously pursues powerful monetary easing.”

As for inflation expectations, Shirai noted, “Medium- to long-term
inflation expectations can be assumed to remain stable throughout the projection
period, given that the expectations of market participants and economists have
been stable at around 1% and households have not changed their views
significantly.”

But she warned, “A moderate drop in medium- to long-term inflation
expectations appears to have emerged very recently, so I will pay close
attention to future development.”

She also voiced concern over the impact of a prolonged weak exports and
industrial production, saying, “Japanese economic activity is expected to remain
relatively weak for the time being. Both exports and industrial production are
expected to decline.”

After its latest meeting on Nov. 19-20, the BOJ’s policy board voted
unanimously, as expected, to maintain practically zero short-term interest rates
and left the scale of its financial asset-buying fund at Y91 trillion.

Last month the BOJ decided to boost the scale of its asset-buying fund to
Y91 trillion from Y80 after raising it from Y70 trillion in September in the
face of growing downside risks to a recovery in growth and prices.

“The weakness in exports and industrial production will constrain business
outlays in the manufacturing sector, any may lead more firms to postpone their
fixed investment plans,” she said.

The next key indicator to watch is the BOJ’s December Tankan survey for
business sentiment and capex plans for this fiscal year, due out on Dec. 14
before the Dec. 19-20 BOJ policy meeting.

Shirai also said, “The weak performance of the manufacturing sector is
likely to deteriorate supply-demand imbalance in the labor market for the time
being.”

With regard to other risk factors, Shirai pointed to possible downward
adjustments related to overseas economies, including issues such as the European
sovereign debt crisis, the fiscal cliff in the U.S. and the continued slower
economic growth in China.

Uncertainty remains over the public’s longer-term growth expectations,
which may be adjusted downward by slow progress in efforts by the government and
private sector to strengthen the growth potential of Japan’s economy, she said.

Among other downside risks, she pointed to “the greater-than-expected
adverse impact of the consumption tax hike and Japan’s fiscal sustainability
issues.”

In August the Japanese parliament enacted by majority vote legislation that
would double the current 5% sales tax by 2015 and improve social security
services on condition that the economy continues to recover steadily.

On prices, Shirai repeated the BOJ’s official outlook: “In fiscal 2014, it
is projected to move steadily closer toward 1%, the inflation goal set for the
time being.”

“Careful attention should be paid to whether firms will raise prices with
improved economic conditions as expected,” she said.

“If firms and households increasingly expect the pace of price increase to
remain slow based on price behavior in the recent and more distant past,
downward pressure may be exerted on both actual prices and wages.”

–MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hinoue@mni-news.com
–MNI Tokyo Bureau; tel: +81 90-4670-5309; email: msato@mni-news.com

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