BOJ Sticks to Easing as Some Board Members Cautious on Outlook

The Bank of Japan maintained its unprecedented easing and forecast inflation will reach its target, even as some board members cautioned that the price outlook was too optimistic.

Governor Haruhiko Kuroda’s board stuck with a pledge to expand the monetary base by 60 trillion to 70 trillion yen ($711 billion) a year, in a decision in Tokyo today. Japan will see average inflation of 1.9 percent in the 2015 fiscal year, according to the board’s median forecast, which strips out the effect of sales-tax increases -- the same forecast as in July, a separate statement showed.

Takehiro Sato, Takahide Kiuchi and Sayuri Shirai opposed the wording of the price outlook and voted against the report, highlighting the risk that mixed messages from within the board will make it harder for Kuroda to maintain confidence in the campaign to stamp out deflation. While yen weakness and higher energy prices have countered deflation, a 0.7 percent increase in the BOJ’s key price gauge last month showed that the goal of 2 percent inflation remains distant.

“Shirai pointed out the outlook report should reflect more downside risks,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “That’s a sign that the assessment of Japan’s economy is becoming more difficult. We have more uncertainties compared with April.”

Inflation Target

Japanese stocks fell, with the Topix index dropping 0.9 percent in Tokyo today as companies including Nippon Yusen K.K. and GS Yuasa Corp. declined on earnings and a stronger yen. The currency was up 0.3 percent at 98.20 per dollar at 7:18 p.m.

The BOJ said Japan is on track to hit its inflation target, with the economy projected to grow faster than potential over the forecast period through March 2016. Inflation will rise to about 2 percent in the latter half of the period, Kuroda said at a press conference in Tokyo.

“Both Sato and Kiuchi requested that the outlook report wording, which said there was a high possibility of reaching the 2 percent target in the second half of the projection period, be changed,” Kuroda said.

The opposition by Kiuchi and Sato was similar to that in April, according to Kuroda. At that time they requested a weakening of the wording that the year-on-year rate of change in the CPI “is likely to reach around 2 percent.”

Policy Adjustments

In April, Shirai requested that the report be made easier to understand and clearly describe the risk of a decline in household income from the sales-tax increase. All the proposals were defeated by 8-1 votes. Kiuchi and Sato dissented from the April report, with Shirai voting for it.

The BOJ said today attention should be paid to the impact of the sales-tax increase and that it will make policy adjustments as needed.

The BOJ projected core consumer prices, which exclude fresh food, will increase 1.3 percent in the year from April, according to the median estimate of the board members. The economy will expand 1.5 percent next fiscal year -- faster than a 1.3 percent expansion it projected in July -- and 1.5 percent in the following year, according to the projections in the semi-annual outlook.

After jolting the economy with fiscal and monetary stimulus, Prime Minister Shinzo Abe is pressing companies for the wage gains needed to drive a sustained recovery.

Tax Impact

Economists estimate growth slowed in the three months ended Sept. 30 after the economy expanded an annualized 3.8 percent in the previous quarter. BNP Paribas SA today forecast growth of 1.7 percent and Nomura Securities Co. yesterday estimated a 2.1 percent expansion.

The BOJ is likely to step up its easing between April and June next year to support the economy after the increase in the sales tax, according to 20 of 34 economists surveyed by Bloomberg News.

The economy is forecast to contract in the April-June before returning to growth, according to a separate survey by Bloomberg.

While consumer prices have started to rise, household incomes continue to fall, squeezing consumers, even as Abe urges companies to raise workers’ wages as part of his bid to reflate the world’s third-largest economy.

Regular wages excluding overtime and bonuses dropped 0.3 percent in September from a year earlier, marking a 16th straight month of decline, according to labor ministry data released today. Total cash earnings rose 0.1 percent.

The central bank should be prepared to step in if needed after the sales tax is raised, Etsuro Honda, one of Abe’s top economic aides, said yesterday in an interview at the Prime Minister’s office in Tokyo.

“The Bank of Japan will do more aggressive easing in the case that real GDP plunges deeper than we expected after April,” Honda said. Any decision on further central bank stimulus would probably have to wait until after growth data comes out for the April-June period, he said.

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