The Bank of Japan could decide as soon as mid-May whether further stimulus is needed to keep inflation on track for its 2 percent target after a sales-tax bump next month, an adviser to Prime Minister Shinzo Abe said.
“If the BOJ judges that the economy has fallen off its projected path, it will act appropriately and flexibly, and further easing is possible,” Etsuro Honda said in an interview at the Prime Minister’s Office in Tokyo yesterday. “I believe the BOJ will act if it sees changes in price expectations.”
While Honda, 59, said he’s become more confident the economy will withstand the higher levy as inflation expectations take root and price gains accelerate, the first indications of the extent of the blow will appear in May. Honda said he sees “considerable” room for the BOJ to boost the pace it buys exchange-traded funds should it deem more stimulus is needed.
The economy is forecast to contract an annualized 3.5 percent in the three months from April, when the sales levy will rise to 8 percent from 5 percent. Abe is lifting the tax in an effort to rein in the world’s biggest debt burden, even as he tries to end 15 years of deflation with fiscal and monetary stimulus and steps to boost private-sector growth.
Thirty-eight percent of economists forecast the BOJ will add to monetary easing by the end of June and 73 percent see it by the end of September, according to a Bloomberg News survey this month.
The yen weakened after the Honda remarks and was trading at 102.39 per dollar at 9:21 a.m., down 0.1 percent. The Topix index of shares climbed 0.9 percent, gaining for a third day after a gauge of U.S. consumer confidence rose to a six-year high.
Foreign investors are focused on the timing and content of any additional easing by the BOJ, wrote Royal Bank of Scotland Group Plc economists led by Junko Nishioka, who said they met with investors in Hong Kong and the U.K. this month.
“Overseas investors strongly believe that the Japanese economy’s prospects fundamentally rely on whether the BOJ’s easing stance continues a commitment to raising stock prices, even beyond the important question of whether it reaches a 2 percent inflation price target,” Nishioka and Long Hanhua Wang wrote in a March 25 note.
If leading economic indicators that reflect outlooks for sales, profits and inflation do not show a big dent as a result of the sales-tax increase, further easing would not be needed, Honda said.
Honda said he was less pessimistic on the economic outlook than he was several months ago. In an interview in October, he said he wanted the BOJ to constantly take a fighting pose as it takes time for the effects of monetary policy to be felt.
“I am still not entirely confident but CPI is rising in a more stable manner than I had anticipated, while expectations as well as real inflation rates are rising more smoothly and solidly than I had thought,” he said.
Consumer prices excluding fresh food -- the BOJ’s main inflation gauge -- rose 1.3 percent in January from a year earlier, the fastest pace since 2008.
The central bank wouldn’t need to double the pace that it accumulates Japanese government bonds should it determine that additional stimulus is necessary, Honda said. Koichi Hamada, a retired Yale University professor who also advises Abe, said in an interview this month that it was “not taboo” for the BOJ to double its goal of bond holdings.
The BOJ currently aims to boost government bond holdings by 50 trillion yen ($489 billion) and its ETF holdings by 1 trillion yen per year, as part of the unprecedented easing that Governor Haruhiko Kuroda began in April last year.
Kuroda reiterated last week he will adjust policy without hesitation if risks appear that could prevent the economy from achieving the central bank’s goal.
“We have been taking a stance of doing whatever we can to achieve the 2 percent price stability target,” Kuroda said in London on March 21.
Honda, who advised the premier on his choice of central bank governor, has workspace next to Abe’s on the fifth floor of the Prime Minister’s Office. He’s know Abe since they met a wedding reception about 30 years ago.