Japan Price Slide Shows Risks From BOJ Delay in Easing: Economy

Japan’s consumer prices fell for the seventh time in eight months, underscoring the risk that the central bank may struggle to reach a 2 percent inflation target unless it implements new easing measures earlier than planned.

Consumer prices excluding fresh food fell 0.2 percent in December from a year earlier, the government said in Tokyo today, matching the median estimate of 23 economists surveyed by Bloomberg News. Bank of Japan Governor Masaaki Shirakawa said today that meeting the target would not be easy and that central banks need to be alert to financial bubbles.

Deputy Economy Minister Yasutoshi Nishimura said in an interview yesterday that reaching the inflation target announced this week will be difficult without more easing, as he endorsed further yen weakness. Minutes of a December BOJ meeting released today show that some members were in favor of making asset purchases in the first half of 2013 to support an economy that contracted in the second and third quarters of last year.

“There is no doubt that the 2 percent target is too high,” said Yuichi Kodama, Tokyo-based chief economist at Meiji Yasuda Life Insurance Co. “The BOJ will have to implement much looser measures.”

The yen fell, heading for a record stretch of weekly losses against the dollar. The currency was 0.2 percent lower at 90.50 per dollar as of 4:14 p.m in Tokyo. The Nikkei 225 Stock Average closed 2.9 percent higher, while the Topix Index capped its longest weekly winning streak since 1973.

The BOJ said this week that it will shift to Federal Reserve-style open-ended asset purchases from January 2014 and target the achievement of 2 percent inflation “at the earliest possible time.” The central bank’s forecasts this week showed inflation at 0.9 percent in the year starting April 2014.

Buy Bonds

Shirakawa said that the nation faces the risk of higher bond yields if the BOJ buys “more and more” debt.

“If we change policy to buy more and more bonds to mechanically achieve 2% inflation, people might think we are financing government spending,” Shirakawa told reporters today. “Long-term interest rates would rise, and the effects of monetary easing would be lost.”

He also said that central banks have a responsibility to prevent bubbles and keep the economy stable.

Investors are betting they have at least 30 years until the BOJ’s efforts to reach its target pose a threat to their bond holdings. Japan’s 30-year government bond yield was at 1.995 percent, while the benchmark 10-year yield fell to 0.72 percent, the lowest since Dec. 14.

Daiei Inc. supermarkets will cut the price of 1,000 goods by an average of 12 percent from this weekend, the company said in a Jan. 22 statement.

Bold Easing

Abe, who said yesterday that he expects bold easing from the central bank, takes his plan to pull the economy out of recession to a divided parliament next week, seeking to win support for reshaping the BOJ after Shirakawa’s term ends in April.

The Diet opens on Jan. 28 with the Liberal Democratic Party back in power after last month’s landslide win in lower house elections, with Abe under pressure to fulfill his pledge to revive the world’s third-largest economy.

Goldman Sachs Group Inc. said this week it sees inflation at 0.5 percent at the end of next fiscal year and said the BOJ’s inflation target remains “far off.” The bank raised its Japan growth forecast for the year beginning April 2013 to 2 percent from 1.2 percent.

Abe says he wants a BOJ chief who supports using monetary stimulus to revive growth. His nominees for governor must be approved in the opposition-controlled upper house, which will hold elections in July.

Yen Demand

One BOJ board member said ending interest payments on banks’ reserves at the BOJ would weaken demand for the yen as a safe-haven, the minutes of the Dec. 19-20 meeting released today showed.

Elsewhere in Asia, Singapore’s industrial production fell for the fourth time in five months in December.

In Europe, Britain’s economy likely shrank in the fourth quarter as a boost from the 2012 Olympic Games during the summer unwound, leaving the country on the brink of an unprecedented triple-dip recession.

In the U.S., new-home sales probably picked up in December, economists predicted ahead of a Commerce Department report.

Deputy Economy Minister Nishimura, who spoke after data showed Japanese exports fell for seven months, joined officials pushing back at international criticism as the yen’s more than 9 percent decline in two months causes friction ahead of February’s Group of 20 meeting.

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