For the first time, Bank of Japan Governor Haruhiko Kuroda said his original two-year timeframe for reaching 2 percent inflation won’t be reached. But it didn’t prompt him to step on the stimulus accelerator.
That combination escalated the risk of the central bank being perceived as the type of reactive -- and ineffective -- institution reflationists say it was under Kuroda’s predecessor. In a press conference after Thursday’s board meeting, Kuroda went on the defensive, repeatedly saying no easing was needed now and that there was no need for trust in the BOJ to fall.
“There’s a danger that the BOJ will become reactive, rather than proactive, if the central bank keeps a wait-and-see stance for too long,” said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance Co. in Tokyo.
It’s a far cry from where Kuroda, 70, an Oxford University-educated reflation advocate for more than a decade before he took the BOJ’s helm, planned to be two years after unleashing a bigger-than-forecast asset-purchase program. His campaign ran into road bumps with a 2014 recession triggered by a sales-tax increase and a slump in oil that’s restrained consumer prices.
“It’s true that the outlook for reaching the price target has been delayed -- from around fiscal 2015 to around the first half of fiscal 2016,” Kuroda said at a press briefing in Tokyo after the BOJ lowered its inflation and growth forecasts. “But the trend of prices is steadily improving and expected to keep doing so. Considering that, I don’t think we need additional stimulus at this stage.”
Fresh evidence of the scale of the BOJ’s challenge came Friday morning, with a government report showing that consumer prices -- stripping out the impact of last year’s tax boost and the volatile fresh food category -- rose 0.2 percent in March from a year earlier, one tenth the central bank’s target.
Prices will probably rise 0.8 percent for the fiscal year through March 2016, according to the median estimate of BOJ board members released Thursday. The following year inflation is seen at 2 percent, with 1.9 percent penciled in for fiscal 2017.
“I don’t see a good explanation from the BOJ on what will power inflation and bring it to 2 percent,” said Junichi Makino, an economist at SMBC Nikko Securities Inc. “The BOJ is being reactive. If data don’t back up their scenario on prices, they don’t have a choice but to be reactive.”
Kuroda’s predecessor, Masaaki Shirakawa, was criticized for holding off on stepping up monetary easing until political pressure and stock-market declines forced the board’s hand. Kuroda sought to change that in April 2013, unleashing an unprecedented commitment to double the nation’s monetary base within two years, thereby achieving the 2 percent inflation target.
When he met with his board in October, he led his colleagues in a 5-4 vote to expand the annual target for increasing the monetary base to 80 trillion yen ($673 billion) from as much as 70 trillion yen -- confounding almost universal forecasts for the BOJ to stand pat. One justification, just weeks after Kuroda said there was no change in his view that prices would keep rising, was a weaker outlook in quarterly BOJ forecasts.
On Thursday, the forecasts were also lowered. Kuroda ascribed the setback to the tumble in oil prices that central banks around the world are contending with. He has repeatedly said the decline will be a bonus to Japan, boosting spending and ultimately prices.
The problem: consumers, at least for now, aren’t rushing to spend their extra cash. Retail sales slid 1.9 percent in March from February, capping a decline for the quarter, according to JPMorgan Chase & Co. estimates.
Historically high -- though still muted -- wage gains should add to consumers’ firepower in coming months.
“The mechanism for a gradual increase in gains for consumer prices is continuing to work -- with wage growth on the back of a tightening labor market, and solid corporate profits,” the BOJ governor said.
While the yen and Japanese stocks initially signaled investor disappointment at the BOJ’s decision, the exchange rate turned around later in the day as Kuroda repeated that the central bank would act if needed.
Japan’s currency was down 0.2 percent a 119.63 per dollar at 10:10 a.m. in Tokyo on Friday morning, and has tumbled 18 percent the past two years amid the BOJ’s easing.
“The key point is whether a rise in wages will increase private consumption, leading to a demand-pull rise in consumer prices -- we’ll probably see a clear gap between the BOJ’s bullish view and actual prices around July,” said Daiju Aoki, an economist at UBS Group AG in Tokyo. “If the BOJ doesn’t ease further in July, it may betray people’s expectations, which may hurt trust in the BOJ.”
Kozo Yamamoto, a Japanese ruling Liberal Democratic Party lawmaker, said he’s “a little disappointed” in the decision Thursday to refrain from boosting stimulus. The BOJ is overly optimistic about the economy, and even if it expands easing later, there’s a possibility it would be considered to be “too little, too late,” Yamamoto said in an interview.
The challenge in any Round Three of Kuroda-era easing will be reviving the surprise factor -- a strategy calibrated to help end what Prime Minister Shinzo Abe has called a deflationary mindset among the Japanese.
“Every time there’s been easing there were some surprises -- so the question is what will it be this time, like a magician taking a rabbit out of the hat,” Masaaki Kanno, chief Japan economist at JPMorgan in Tokyo, who previously worked at the central bank, said earlier this week.
One option: extending the timeline out to 2018 for the BOJ’s target, while boosting it to 3 percent, in an overshoot to shock people into higher expectations for prices, Kanno says.
“If the BOJ waits for further easing too long, there will be a danger that it will become reactive,” said Aoki at UBS. “If that happens, the BOJ won’t be able to work on people’s expectations unless it makes a considerably big surprise.”