BOJ Puts Credibility on Line With Inflation Call as Prices Slump

Bank of Japan board members forecasting an end to more than a decade of deflation may need to add to an already unprecedented monetary stimulus plan should consumer prices fail to align with their projections by October.

The nine-member panel yesterday predicted that consumer prices, excluding a pending sales-tax increase and volatile fresh food costs, will rise 0.7 percent in the year through March, then 1.4 percent and 1.9 percent in the following two years. The measure slid 0.5 percent last month.

With companies from Sony Corp. to Japan Tobacco Inc. boosting profit forecasts based on a tumbling yen and surging stocks sparked by Governor Haruhiko Kuroda’s monetary expansion, the risk is continued price declines will erode BOJ credibility. The BOJ’s next forecasts are due in October, suggesting another dab of stimulus could come that month, JPMorgan Chase & Co. and Barclays Plc said.

“Kuroda will probably have to bolster stimulus in October as prices won’t be on the desired track,” said Kyohei Morita, chief economist at Barclays in Tokyo. At the same time, “boosting consumer prices by more stimulus will get harder and harder. His credibility will be at stake.''

The yen rose yesterday after a government report showed the biggest drop in the core consumer price index in two years, the BOJ kept its monetary stance unchanged and later released its economic forecasts. Against the dollar, it advanced 0.6 percent to 98.64 as of 6 p.m. in Tokyo. The Nikkei 225 Stock Average closed down 0.3 percent.

Yen’s Slide

Since mid-November, the yen has tumbled 18 percent and the Nikkei climbed 60 percent on optimism about Abenomics, the reflationary policy framework promoted by Prime Minister Shinzo Abe, who won office in December and installed Kuroda in March. Yesterday, Abe’s economic adviser, Etsuro Honda, said that the BOJ would achieve a 2 percent inflation goal.

Japan Tobacco, the world’s best-performing cigarette maker this year, closed at a record yesterday after its earnings showed the benefit of a more competitive exchange rate. Sony this week reported its first annual profit in five years.

Nomura Holdings Inc. yesterday said its quarterly profit more than tripled to the highest in seven years, as investment banking fees and brokerage commissions surged. Stock trading volume has boosted brokerage-fee income and Japanese stock offerings have tripled, to 1.7 trillion yen ($17 billion) so far this year.

Kuroda and his colleagues will need the improvement in corporate sentiment to feed through to wages and investment for their easing to be effective. On a sustained basis, consumer prices haven’t risen at the 2 percent pace the BOJ set as its target in January since the early 1990s.

Wage Effects

“Wages are the most important parameter” for prices of services, which may remain flat amid a modest gain in the cost of goods, said Masaaki Kanno, chief Japan economist at JPMorgan Chase in Tokyo and a former BOJ official. “At the earliest, the BOJ will ease further in October, when the next CPI forecasts come out. Or maybe in January next year when the bank is forced to admit it is hard to achieve 2 percent inflation in time.”

Policy board members are divided over the outlook for inflation, with some anticipating that prices won’t rise at even half the targeted rate of 2 percent. While the highest of their projections for fiscal 2015 is for a 2.3 percent gain excluding the tax increase, the lowest is 0.8 percent.

Former investment-bank economists Takahide Kiuchi and Takehiro Sato, who joined the board last year, opposed yesterday’s statement that inflation is likely to reach 2 percent in the latter half of the three-year BOJ forecast horizon, Kuroda told reporters at a press briefing. Kuroda said he personally thinks the goal will be achieved in the 2015 fiscal year.

Policy Adjustments

Kuroda said that no board member judged that additional easing was needed now, and that policy adjustments would be made if necessary. The bank will keep its stimulus until stable 2 percent gains in consumer prices are realized, he said.

The BOJ yesterday restated a commitment to enlarge the monetary base, a gauge that includes physical currency in circulation plus assets financial institutions hold at the BOJ, by 60 trillion yen to 70 trillion yen a year.

Eisuke Sakakibara, an ex-Finance Ministry colleague, has predicted Kuroda will fail to achieve the 2 percent price goal, and former BOJ board member Atsushi Mizuno sees the central bank hitting a “wall of reality” as bond purchases escalate risks of a market bubble. Kazumasa Iwata, a former deputy governor, deemed Kuroda’s two-year goal “impossible.”

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