Bank of Japan May Prove Wrong on '11 Deflation-End Call, Board Member Says

Bank of Japan board member Miyako Suda said the nation probably won’t overcome deflation in the year starting April, an outlook that conflicts with the central bank’s forecast of moderate inflation in the year.

“Chances of overcoming negative core consumer prices in the next fiscal year aren’t high,” Suda said in a speech in Yamagata, northern Japan, today, referring to the 12 months starting April. “It will take a while to beat deflation.”

Suda, the board’s longest-serving member whose term expires in March, refrained from offering any proposals to beat more than a decade of price declines. The central bank in October cut its interest rates to close to zero and created a 5 trillion-yen ($60 billion) fund to buy government and corporate debt as well as riskier instruments including exchange-traded funds.

“Given that Suda is a relatively hawkish member of the board, the fact she said prices will keep falling suggests the BOJ may delay ending its comprehensive easing program,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. “There’s no way the conditions necessary for price increases will be set in fiscal 2011.”

Suda is the first board member to indicate deflation may linger beyond next year since the BOJ policy board forecast in October that core consumer prices will rise 0.1 percent in fiscal 2011. Prices by that measure, which excludes fresh food, fell 0.6 percent in October, the 20th straight drop.

The rebasing of the price index next August also lowers chances of overcoming price declines, Suda said. The statistics bureau will reshuffle the basket of goods used to measure CPI, a move that Goldman Sachs Group Inc. estimates may lower the inflation rate by 0.4 percentage point.

Risks Linger

Suda said that risks for the economy may linger as the yen’s advance against the dollar clouds the outlook for growth. Reports in the past week have shown exports rose at the slowest pace this year and factory production declined for a fifth month, evidence that points to the economic expansion weakening in the final quarter of 2010.

“Given the strong yen and deterioration in corporate and consumer sentiment, there’s a high risk that the temporary weakening in the economy will be sustained,” Suda said.

BOJ Governor Masaaki Shirakawa said this week that expanding the bank’s asset-buying program is a “probable option” if the bank needs to ease monetary policy further.

Suda later told reporters that the central bank is aware it may need to diversify the assets purchased in the 5 trillion-yen fund to avoid exerting too much influence over specific markets.

Foreign-Currency Assets

Asked whether those purchases could include foreign- currency assets, Suda said the chances were “extremely low, but not zero.” She added such buys could be interpreted as a form of currency intervention.

The bank in October pledged to maintain ”virtually zero” interest rates until an outlook emerges for sustained price increases. Board members say they consider inflation stable in a positive range of up to 2 percent, with their median estimate at 1 percent.

“The Bank of Japan will remain under pressure to ease further given the economic outlook is murky,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Japan’s economy is in a soft patch with a risk of a delayed recovery because the impact of the strong yen will weigh more on growth from this quarter.”

To contact the reporter on this story: Toru Fujioka in Yamagata at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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