Goldman’s O’Neill Says Bank of Japan Can Beat Deflation

The Bank of Japan can achieve its goal of 2 percent inflation within two years and may need to concern itself with containing prices if it succeeds, according to Goldman Sachs Asset Management Chairman Jim O’Neill.

If the central bank is truly committed to reaching its target, then it can, London-based O’Neill said at a Goldman Sachs seminar in Tokyo today. BOJ governor Haruhiko Kuroda has pledged to do “whatever it takes” to beat deflation and plans to double the monetary base -- cash in circulation and the money that financial institutions have on deposit at the central bank -- within two years in pursuit of that goal.

“They’ve set it themselves and they’ve got to keep doing things to get to what is their target,” O’Neill said. “If they do start to get 2 percent inflation in the next two years, how do they stop it going, at least for a brief while, to quite a bit more than 2 percent. That to me would be more of a valid issue than whether they will be able to do it.”

The 56-year-old’s confidence in Japan’s central bank runs counter to skeptics from Bill Gross, who runs the world’s biggest bond fund, to former BOJ Deputy Governor Kazumasa Iwata. The Topix Index, Japan’s broadest equity measure, has rallied 55 percent since November on pledges to end deflation while the two-year rate on overnight-index swaps, used to wager on changes in the BOJ’s target rate, is set for its biggest monthly jump since November 2010.

Where previous inflation targeting exercises in Japan have been “a bit of a game,” this time around things are different, O’Neill said.

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Goldman Sachs last week raised its outlook on Japanese shares for the fourth time this year citing the BOJ’s “credible commitment” to beat deflation.

“The biggest change is that the government and the central bank are on the same page said ‘‘let’s exit deflation,’’” Kathy Matsui, chief Japan strategist at Goldman Sachs, said during a panel discussion with O’Neill at the seminar. “It’s not that important whether they can achieve 2 percent inflation, but the key is they set the target. The absolute commitment to beating deflation is paramount.”

Analysts led by Matsui boosted the 12-month Topix Index outlook to 1,350 from 1,250. Goldman Sachs also raised its 12-month Nikkei 225 Stock Average estimate to 16,000 from 15,000. The brokerage also sees the Topix reaching 1,600 and the Nikkei 225 at 19,000 before fiscal 2015.

The average estimate for the Topix Index at year end is 1,160, according to a Bloomberg News survey of 15 strategists.

O’Neill will step down this year from his current role as chairman of Goldman Sachs’s asset-management division, which he has held since 2010, according to a February announcement. He joined the company in 1995 as a partner, became head of global economics, commodities and strategy research in 2001 and was added to the European management committee in 2006.

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