Bank of Japan Sticks to Record Easing as Inflation Picks Up

The Bank of Japan refrained from boosting unprecedented easing as accelerating inflation marks progress in its bid to stamp out 15 years of falling prices in Asia’s second-biggest economy.

Governor Haruhiko Kuroda’s board stuck to its pledge to expand the monetary base by an annual 60 trillion to 70 trillion yen ($671 billion) today after a two-day meeting in Tokyo, in line with the forecasts of all 36 economists surveyed by Bloomberg News. The BOJ maintained its projection that core consumer prices will rise 1.9 percent in the year starting April 2015, excluding the effect of sales-tax increases, and scrapped a reference to the economy facing “uncertainty.”

With the BOJ’s preferred inflation gauge at more than half of its target 2 percent pace, analysts from HSBC Holdings Plc. to Daiwa Securities Co. have pushed back forecasts for when the central bank may add to easing. Kuroda may wait to assess trends in wages and the effects of a sales-tax increase in April before deciding on any extra stimulus.

“Prices have been moving in line with our forecast,” Kuroda told reporters after the meeting. “If upside or downside risks don’t materialize, we’ll continue with current policy.”

More Confident

The yen was little changed against the dollar at 4:49 p.m. in Tokyo after strengthening following the policy decision earlier in the day. The Japanese currency was at 104.32 per dollar. The Topix closed up 0.3 percent.

Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since 2008 and approaching the 2 percent target set a year ago. For the final quarter of 2013, analysts estimate inflation was 1.1 percent, according to a separate poll, nearly three times economists’ 0.4 percent forecast in a survey in April last year.

The rate of increase in core consumer prices is likely to be around 1.25 percent “for some time,” the BOJ said in a statement.

Nippon Paper Industries Co. said this week it will boost the price of milk cartons as much as 15 percent from April because of higher prices of imported paper and a weak yen.

In an update to its October outlook, the BOJ said the lowest board member inflation estimates increased for all three fiscal years through fiscal 2015. The BOJ’s inflation forecasts are median estimates of the nine board members.

Sales Tax

Today’s statement said that Japan’s economy has continued to recover moderately, and noted front-loaded demand ahead of the April sales-tax bump. Overseas economies, mainly advanced ones, are starting to recover, the BOJ said.

“The Bank of Japan is saying it’s gaining confidence that it will achieve its target,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo and former central bank official. “The question now is whether they will act to support the recovery as the sales tax is raised.”

In a statement following its Dec. 20 meeting, the BOJ said “there remains a high degree of uncertainty concerning Japan’s economy” -- a reference that didn’t appear in today’s statement. The BOJ today cited risks including developments in emerging and commodity-exporting economies, the European debt problem and the pace of U.S. recovery.

Income Risk

Board Member Sayuri Shirai dissented from the description of risks to the bank’s outlook. She suggested that the pace of improvement in employment and income should be added as risks, which didn’t include the April sales-tax increase.

“A reference to tax-hike related risks in the policy statement will be a dovish signal that the board is considering additional easing, and Shirai’s proposal is the opening for such a move,” Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong, wrote in a note.

The percentage of economists predicting an expansion of stimulus between April and June fell to 33 percent from 56 percent three months ago in the latest Bloomberg survey, which was conducted Jan. 10-15.

The number of analysts forecasting the central bank will add to its easing in July or later doubled to 48 percent from three months ago, the survey showed. The rest of the economists see additional loosening this quarter.

Economy Minister Akira Amari said yesterday that there’s still a risk that the economy could fall back into the trend of declining prices.

‘Political Reasons’

The strength of Japan’s economic recovery will be tested after the sales tax is increased to 8 percent in April from 5 percent, a move that economists forecast will trigger a 4.1 percent annualized contraction in the second quarter.

“The BOJ may act for political reasons after the sales tax is raised to show its stance to support the economy, given Abe’s efforts to end deflation,” Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo, said before today’s announcement.

Prime Minister Shinzo Abe has said he wants incomes to rise more quickly than inflation. Prices will rise five times faster than wages in the fiscal year starting in April, according to a Bloomberg survey in December.

Japan’s base wages, excluding bonuses and overtime, fell 0.6 percent in November from a year earlier, an 18th straight decline month, according to labor ministry data released this month.

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