BOJ Seen Postponing 2% Inflation Goal as Policy Kept Steady

Photographer: Tomohiro Ohsumi/Bloomberg

Pedestrians walk past the Bank of Japan headquarters in Tokyo. The BOJ said in its outlook report last month that consumer prices “will likely reach around 2 percent toward the latter half of the projection period,” which will run to the end of March 2016, having started in April. Close

Pedestrians walk past the Bank of Japan headquarters in Tokyo. The BOJ said in its... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

Pedestrians walk past the Bank of Japan headquarters in Tokyo. The BOJ said in its outlook report last month that consumer prices “will likely reach around 2 percent toward the latter half of the projection period,” which will run to the end of March 2016, having started in April.

The Bank of Japan will need to postpone the time-frame for achieving a 2 percent inflation target as it refrains from enlarging its asset-purchase program, economists forecast in a Bloomberg News survey.

Twenty-two of 37 analysts see Governor Haruhiko Kuroda’s board altering the objective adopted in April. JPMorgan Chase & Co. says the change may come in April or July next year, with the time-frame extended to the fiscal year starting April 2016. The BOJ today stuck with a pledge to expand the monetary base by 60-70 trillion yen ($700 billion) a year.

An economic slowdown last quarter and the likely blow to consumption from a sales-tax increase in April next year highlight the risk that Abenomics will lose steam and fail to stamp out deflation. The central bank estimated last month that a key inflation gauge will rise 1.9 percent in the fiscal year starting April 2015, an assessment that economists dispute.

“The BOJ will at first extend the time-frame for its goal,” said Kyohei Morita, chief Japan economist at Barclays Plc. “Revising or abandoning the 2 percent part of the target is a non-starter as it would provoke a market backlash.”

The central bank said in April it will achieve the target “at the earliest possible time, with a time horizon of about two years.”

Policy Action

It’s too soon to discuss any policy changes as Japan’s economic recovery remains on track, Kuroda said at a press conference following the BOJ’s decision. The central bank has room to act against upside and downside risks, he said.

“It’s too early to discuss specifics about our response as Japan’s economy is moving in line with our expectations, and upside and downside risks are not about to appear,” Kuroda said, adding that the central bank won’t hesitate to make policy adjustments if needed.

Kuroda declined to comment when asked why private-sector economists and the BOJ differed in their views on reaching the 2 percent target in two years.

The BOJ said overseas economies as a whole are “picking up moderately,” revising its wording from Oct. 4, when it said they were “gradually heading toward a pick-up.”

The decision today was in line with all forecasts in the Bloomberg survey.

The Topix index rose 1 percent in Tokyo today after falling the past two days, as the yen extended declines and investors weighed recommendations that the country’s $1.21 trillion pension fund invest more in risk assets. The Japanese currency traded at 100.81 per dollar at 4:55 p.m., down 0.8 percent.

Breakeven Rate

At the policy meeting, board member Takahide Kiuchi repeated his proposal for the BOJ to switch to a target of 2 percent inflation in the “medium to long term,” and to describe its easing as “an intensive measure” intended to last about two years.

Masaaki Kanno, chief economist at JPMorgan in Tokyo and a former central bank official, earlier said the BOJ may alter its time-frame when it revises down its price forecast for fiscal 2015. Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, said the change may be made in October next year.

Of the economists polled, 35 said the BOJ won’t achieve its goal.

Inflation expectations have fallen from a May high. The so-called breakeven rate that represents the inflation level that investors expect over five years was at 1.53 percentage points today, compared with a 1.89 point reading on May 23.

Fed Minutes

Parting company with the target would mark an end to Kuroda’s effort in April to simplify the BOJ’s communication by expressing his goals as a series of twos -- pledging to double the monetary base in two years to achieve 2 percent inflation.

Nineteen economists in the Bloomberg survey said the BOJ will add stimulus in the second quarter of next year after the sales-tax bump, with seven saying it will ease in the July-September period.

The BOJ’s American counterpart is by contrast debating whether to scale back stimulus. Minutes of the Federal Open Market Committee’s meeting three weeks ago released yesterday showed that a reduction in the U.S. central bank’s $85 billion in monthly bond purchases is possible “in coming months” as the economy improves.

In Europe, where policy makers are confronted with a Japan-like threat of deflation, officials are considering a new tool - - a negative interest rate for commercial lenders who park excess cash at the European Central Bank. The ECB is discussing a cut of less than the typical quarter percentage point magnitude, two people with knowledge of the debate say.

The Japanese central bank pays an interest rate of 0.1 percent on similar deposits of excess cash.

Joint Statement

The BOJ said in its outlook report last month that consumer prices “will likely reach around 2 percent toward the latter half of the projection period,” which will run to the end of March 2016, having started in April.

A joint statement in January by the bank and government committing to a 2 percent inflation target may be an obstacle to any alteration, according to some analysts including Naomi Muguruma.

“The BOJ can’t modify or abandon its target just because it’s harder to reach than expected as it made a pledge to the public,” said Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. “Unless the yen depreciates further or bond yields rise for bad reasons, the BOJ will have to continue accommodative measures to achieve 2 percent inflation.”

Public Pledge

The central bank adopted the 2 percent inflation goal in January at the prompting of Prime Minister Shinzo Abe, who urged unlimited easing in an election campaign that saw him reinstated as prime minister in December. In April, the BOJ added the 2-year time-frame and committed to buying more than 7 trillion of government bonds a month.

In April, Abe noted that the inflation objective shouldn’t be pursued at “all costs” and could be beyond the nation’s reach if global conditions changed. “What is important is to aim steadily for the target,” he said.

A report on gross domestic product released Nov. 14 pointed to headwinds for Abenomics as companies’ capital spending grew at a slower pace and a trade deficit widened. Gross domestic product rose at an annualized 1.9 percent, down from 3.8 percent the previous quarter, with the gain relying on government spending and an accumulation of inventories.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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