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Bank of Japan Dot Plot Paints a Pessimistic Picture of Inflation

Almost all board members see greater downside risks for prices
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Haruhiko Kuroda, governor of the Bank of Japan (BOJ), speaks during a news conference at the central bank's headquarters in Tokyo, Japan, on Thursday, July 21, 2017.

Photographer: Akio Kon/Bloomberg

Even a quick glance at the Bank of Japan’s latest inflation forecasts makes for disappointing reading. The BOJ pushed back its timetable for hitting 2 percent price gains for a sixth time since Governor Haruhiko Kuroda took over. And it cut its estimates for core CPI for this fiscal year and the next two. 

A close look at the individual projections of the board’s nine members released after its July 19-20 policy meeting is cause for even more pessimism.

Eight of them see risks “tilted to downside” for their price forecast for fiscal 2019 -- the year when the BOJ currently hopes to reach its inflation goal. Put another way, the chances of prices dropping below forecast are way higher than beating it.

Downward pointing triangles in the dot plot below represent estimates from board members who see downside risks to their projection while circles indicate risks are evenly balanced. There are no upward pointing triangles giving reason for optimism.

Source: Bank of Japan

When the BOJ released its previous dot plot in April, there were only six downward triangles for 2019.

Kuroda said it’s “regrettable” that the BOJ has had to repeatedly push back the timing of when it will reach the inflation goal, while repeating that he still sees momentum to get there eventually.

“The BOJ seems to be losing a lot of confidence in its inflation outlook,” Chotaro Morita, chief rates strategist at SMBC Nikko Securities, wrote in a report Friday.

So what does this mean for policy?

According to former BOJ executive director Hideo Hayakawa, the delay to fiscal 2019 is an acknowledgment that the central bank will continue stimulus even beyond 2020, as it's very unlikely the BOJ would start cutting stimulus at the same time as the government makes a planned increase to the sales tax.

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