BOJ Is Said to See CPI at Goal From April 2016, Taper Debate

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Japan's Consumer Prices
Shoppers walk past a drugstore, right, in a shopping arcade in Tokyo. BOJ Governor Haruhiko Kuroda has repeatedly said the central bank will continue to apply stimulus until consumer price gains are stable around the 2 percent target. Photographer: Kiyoshi Ota/Bloomberg

Bank of Japan policy makers are likely to forecast that inflation will reach 2 percent and hold that level for two straight years from the year starting in April 2016, said people familiar with central bank’s discussions.

Such forecasts by the policy board are bound to raise discussions on when the bank should consider reducing its unprecedented monetary stimulus, according to the people, who asked not to be named because the talks are private. The longer-term view contrasts with a possible cut in the BOJ’s price projection for this year, when it presents an outlook report on April 30, they said.

Governor Haruhiko Kuroda has emphasized that any talk of an exit is premature, with price gains stalling and far from the bank’s 2 percent target. With supply constraints growing, wages rising and companies and consumers girding for higher prices, Kuroda said he sees inflation reaching the goal around this fiscal year through March 2016 or early in the following year.

“It’s dangerous to turn attention to future tapering now as the problem in front of the BOJ is slowing inflation,” said Kazuhiko Ogata, an economist at Credit Agricole SA. “The BOJ should consider the way to address current slowing inflation rather than tapering, especially when markets are expecting an expansion in stimulus.”

Yen Gains

The yen strengthened following the Bloomberg report, narrowing earlier losses against the dollar. The Japanese currency was down 0.3 percent at 119.23 at 4:26 p.m.

Kuroda has repeatedly said the central bank will continue to apply stimulus until consumer price gains are stable around the 2 percent target. The BOJ’s main gauge showed inflation slowing to zero in February, weighed down by oil price declines of more than 40 percent in the past year.

The central bank in January lowered its outlook for this fiscal year’s core inflation to 1 percent from 1.7 percent, the second cut under Kuroda’s governorship since March 2013.

Even if another reduction is made when policy makers meet next week, officials believe the underlying inflation trend is positive, according to the people.

The median estimates of the nine-member board are likely to point to inflation of around 2 percent in the year starting in April 2016 and the following year, they said. The forecasts are for average inflation rates during the periods.

Deflation Risk

Some officials are mindful of the possibility that the BOJ may need to start tapering its asset purchases by the end of March 2018, the people said.

The economy faces less risk of a relapse to deflation now than it did in October, when the BOJ bolstered stimulus, Kuroda said on April 8 after the central bank kept unchanged its asset purchase program. At the same time, he repeated his position that the central bank won’t hesitate to expand easing should prospects for achieving its goal become at risk.

Twenty-two of 34 economists in a Bloomberg survey conducted March 31 to April 3 forecast the BOJ will expand easing by the end of October, down from 23 in a survey last month.

In its latest World Economic Outlook earlier this month, the International Monetary Fund said the BOJ should consider strengthening its stimulus as necessary to attain its goal. The bank could boost the share of private assets in its purchases and extend its bond buying to longer maturities, the IMF said.

Exit Strategy

Still, at the working level, the BOJ is studying how it could manage an eventual exit from its unprecedented stimulus, Kuroda said on Thursday. Potential options include raising the rate on excess reserves, absorbing funds through money market operations and not purchasing bonds to replace the bank’s maturing debt holdings, he said.

“We have never talked about an exit at the policy board,” Kuroda said. “There are various options and our staff members are studying the technical side of an exit but we haven’t discussed specifics of what to use in what order yet.”

Four of 32 analysts surveyed by Bloomberg on when the BOJ would be able to start tapering its asset purchases predicted next year. Nine forecast it happening in 2018 or later, while 15 said any tapering was unforeseeable.

Any reverse in the pace of the BOJ’s asset purchases would mark a historic turning point for the most aggressive stimulus by the world’s major central banks.

The BOJ has leeway to buy all new bonds issued by Japan’s government after Kuroda led a divided board on Oct. 31 to expand the asset purchase program that he introduced in April 2013. It held a quarter of outstanding Japanese government bonds at the end of December, the biggest single owner.

With the Japanese government grappling with debt twice the size of the economy, any exit will be a nightmare for Kuroda, according to at former top currency official.

“The thought of exit itself is a nightmare for Japan, not whether it’s premature to talk about it,” Makoto Utsumi said in an interview on April 15. “There is no choice but to keep issuing bonds for financing, and with buying of longer dated JGBs, a natural exit is out of question as is unwinding.”

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