Draghi to Bernanke Inflation Slump Dims BOJ Target

Bank of Japan Governor Haruhiko Kuroda’s bid to end 15 years of persistent deflation is endangered by the failure of counterparts in the U.S. and Europe to meet their own price goals.

Citigroup Inc.’s Inflation Surprise Index for Group of 10 economies dropped to negative 21.80 in October, the lowest since April 1998 and signaling data fell short of analyst estimates. A BOJ board member was monitoring whether domestic consumer prices could keep rising with disinflation overseas, minutes of the Oct. 3-4 policy meeting released last week show.

Japan’s 10-year yield fell to a six-month low on Nov. 8 even after the BOJ restated its view that inflation will quicken toward its 2 percent target. Data this week may show the cost of goods traded among companies fell for the first time in almost a year in October. The European Central Bank unexpectedly cut rates last week as it failed to meet price goals.

“Goods are made and moved worldwide, so their prices are more likely to go up and down in sync,” said Maiko Noguchi, a former BOJ official and a Tokyo-based senior economist at Daiwa Securities Co., Japan’s second-biggest brokerage. “If market participants believed the BOJ was on track to achieve its price target, the current yields would be too low.”

ECB, Fed

The ECB lowered the benchmark rate on Nov. 7 to a record 0.25 percent, with ECB President Mario Draghi saying the currency bloc may “experience a prolonged period of low inflation.” The Federal Open Market Committee, headed by Chairman Ben S. Bernanke, refrained from reducing monthly bond purchases on Sept. 18, as policy makers recognized inflation below its 2 percent target could pose risks to the economy.

Growth in consumer prices has fallen short of policy targets in the U.S., the euro bloc, Switzerland and Sweden, according to data compiled by Bloomberg. The euro zone’s annual inflation rate dropped to 0.7 percent in October, the lowest since November 2009. The Inflation Surprise Index for the G-10 rich countries has been below zero since May 2012.

A BOJ member “was closely monitoring whether factors specific to Japan could lead” to faster inflation “in a situation where signs of improvement in the global disinflationary trend could not yet be observed,” the minutes said.

A price index for corporate goods, an indicator that the BOJ refers to when making policy decisions, probably fell 0.2 percent last month from September, economists forecast in a Bloomberg survey. The central bank report is scheduled for release on Nov. 13.

Inflation Outlook

That would follow a slowdown in annual inflation excluding fresh food to 0.7 percent in September, compared with August’s 0.8 percent, which was the most since November 2008. The central bank forecast on Nov. 1 that the core rate will quicken to 1.9 percent in the year starting April 2015 after stripping out the effect of a planned sales-tax increase.

“The BOJ may be forced to implement additional stimulus as early as January,” after the ECB cut interest rates and as U.S. growth slows, Hiromichi Shirakawa, the Tokyo-based chief economist for Japan at Credit Suisse Group AG, wrote in a research note on Nov. 8.

The 10-year Japanese government bond yield fell as much as one basis point to 0.58 percent at the end of last week, the lowest since May 7, as the BOJ bought 310 billion yen ($3.1 billion) of government bonds. That’s part of the central bank’s more than 7 trillion yen a month of purchases that have helped weaken the yen by more than 19 percent in the past 12 months, the biggest decline among the dollar’s 16 major counterparts.

Foreigner Selling

The 10-year yield rose half a basis point, or 0.005 percentage point, to 0.59 percent today. Foreign investors sold a net 2.13 trillion yen in JGBs in September, the most since March, according to Ministry of Finance data released today.

The currency depreciation spurred more than a 10 percent year-on-year increase in the cost of imported goods every month since May. The yen may drop to 110 per dollar by the end of next year, a separate Bloomberg poll of analysts shows, from 98.95 as of 4:05 p.m. in Tokyo today.

Prime Minister Shinzo Abe unveiled 5 trillion yen in stimulus steps last month to soften the economic blow of the sales-tax increase in April 2014 to 8 percent from 5 percent. He’s called on companies to boost wages to jump-start consumer spending and end deflation.

“I think inflationary pressure will persist because of the currency factor,” said Kazuhiko Ogata, the chief Japan economist in Tokyo at Credit Agricole SA. “It may be too early to draw a rosy picture, but if increased fiscal outlays continue to tighten the demand-supply balance in the economy, there’s a good chance companies will start to raise wages.”

Falling Wages

Wages in Japan after adjusting for inflation slid 1.4 percent in September from a year earlier, marking a 10th drop in the past 12 months, according to labor ministry statistics.

Toyota Motor Corp. President Akio Toyoda told reporters on Nov. 7 that it’s reasonable for corporate managers to raise salaries when profit gains, Kyodo News agency reported. Companies listed on the Topix index of Japanese shares are forecast to post double-digit growth in earnings per share in the next two years, according to analyst estimates compiled by Bloomberg.

The economic slowdown overseas has reduced interest rates relative to Japan’s, a factor that may discourage Japanese money managers from investing abroad. The extra yield that investors can get by holding global government bonds over Japanese debt fell to 1.32 percentage points from about a two-year high of 1.49 on Sept. 10, according to Bank of America Merrill Lynch index data.

“We’ve seen a confirmation of the prolonged period of disinflation in Europe and the U.S., just like in Japan,” said Kenji Sakaguchi, the chief investment officer at Prudential Investment Management Japan Co., which manages the equivalent of $140 billion. “The era of low rates will continue in developed countries.”

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