Inflation Trumps BOJ Forecast

Bank of Japan Governor Haruhiko Kuroda said consumer inflation may exceed the central bank’s projection in the fiscal year that ended in March, voicing confidence the world’s third-largest economy continues to make headway in meeting its price target.

Deputy Governor Hiroshi Nakaso added to the optimism, stressing that Japan can withstand the pain from a sales tax hike that kicked off this month as companies are increasing hiring and wages due to brighter prospects for the economy.

“I think consumer inflation was actually slightly higher in fiscal 2013 than our current projection of 0.7%,” Kuroda told a parliamentary session on Wednesday. “For now, we can say Japan is making steady progress toward achieving 2% inflation.”

His remarks suggest the BOJ will revise up the previous fiscal year’s price forecast and maintain its bullish projections for subsequent years in its twice-yearly outlook report due out next week.

But both Kuroda and Nakaso reiterated the BOJ’s readiness to “adjust policy” with additional monetary stimulus should risks threaten achievement of the price target.

“There are various ways to adjust policy. We will decide what among these measures is appropriate depending on economic and price developments at the time,” Kuroda said.

Japan’s economic growth has slowed since late last year and analysts warn of further weakness in coming months as exports lack momentum and the sales tax hike cools household spending.

But the BOJ has maintained its view Japan’s economy will recover moderately despite the pain from the sales tax increase, suggesting that no immediate easing was on the horizon.

Many market players expect the BOJ to ease policy around July on the view economic growth will not be strong enough to push inflation to 2% any time soon.

The BOJ now expects core consumer inflation to accelerate to 1.9% in the fiscal year ending March 2016 from 1.3% in the current business year to March 2015, excluding the impact of the sales tax hike.

In the new projections due on April 30, the BOJ will likely keep its inflation forecast for fiscal 2015 roughly unchanged from the current 1.9%. The central bank is also set to estimate fiscal 2016 inflation close to 2%, signalling that it is optimistic of achieving sustained price rises over a longer time frame, sources have told Reuters.

The BOJ has stood pat on policy since delivering an intense burst of stimulus in April last year, pledging to double base money via aggressive asset purchases to accelerate consumer inflation to 2% in roughly two years.

Japan’s core consumer prices rose 1.3% in February from a year earlier, the ninth straight month of increase, as the weak yen inflated import costs and a recovering economy allowed more companies to pass on higher costs to consumers.

(c) Copyright Thomson Reuters 2014.