Japan Inc. Says Deflation Is Dead as Abe Kindles Prices

Japanese Prime Minister Shinzo Abe’s bid to rid the economy of 15 years of deflation got a boost, as companies forecast sustained price gains.

The inflation rate will be 1.5 percent in a year’s time and 1.7 percent in three years and in five years, according to average forecasts in a Bank of Japan survey conducted from Feb. 24 to March 31 and released in Tokyo today.

While the central bank may fall short of its target of a stable 2 percent increase in its benchmark price gauge, the forecasts show Abe and BOJ Governor Haruhiko Kuroda are succeeding in fueling inflation expectations. The data give the central bank another reason to hold off from any immediate additional monetary easing as it assesses the blow to economic growth from yesterday’s sales-tax increase.

“The figures allow the BOJ to say their policies are working pretty well and give them an excuse not to ease in the near future,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former central bank official. “If the next few surveys show a clear upward tick in inflation expectations, the BOJ may have to start talking about a gradual tapering -- maybe even as soon as next year.”

The Topix stock index rose for an eighth day, gaining 1.3 percent at 1:41 p.m. in Tokyo after data showed growth in U.S. manufacturing. The yen declined 0.2 percent to 103.86 per dollar.

Japanese households see an inflation rate of 3 percent in one year and 2 percent in five years time, according to a separate survey released by the BOJ today.

’Crucial’ Report

Today’s corporate inflation report -- the first time the central bank asked companies for their price forecast as part of its quarterly Tankan survey -- is “crucial” in helping the BOJ judge policy, after unleashing unprecedented easing in April last year, according to Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo.

The odds of immediate additional easing have receded, Adachi said in an e-mailed note after the company data, adding that JPMorgan would soon present a new call on BOJ policy. The investment bank had expected further stimulus at the April 30 board meeting.

When the BOJ started its current easing campaign in April last year, it said it would aim to achieve stable 2 percent inflation at the “earliest possible time, with a time horizon of about two years.”

The target is based on core consumer prices, which don’t include fresh food, and excludes the effects of yesterday’s sales-levy increase to 8 percent and a planned rise to 10 percent in October next year.

The BOJ asked companies and households to exclude the sales-tax increases from their price forecasts in today’s data.

Small Companies

The economy is forecast to contract at an annualized pace of 3.5 percent in the April-to-June period as the higher levy weakens consumer spending, returning to growth of 2 percent in the following quarter, a survey of economists shows.

Inflation expectations were strongest among small companies, which have started to feel pressure from rising wage costs as Japan’s labor force shrinks. Small manufacturers and non-manufacturers forecast price gains of 1.9 percent three and five years out after an increase of 1.7 percent in the year ahead.

Their expectations exceed those of large companies, which see 1.1 percent inflation in the next 12 months, and 1.3 percent in three years. Large manufacturers expect 1.3 percent price gains in 5 years, while big non-manufacturers forecast 1.2 percent inflation.

“Small and medium-sized companies seem to have a sense of crisis about rising prices and their effect on costs,” said Mari Iwashita, a senior market economist in Tokyo at SMBC Friend Securities Co.

Added Stimulus

The BOJ has said inflation expectations are rising on the whole. Core price gains were unchanged for a third straight month in February at 1.3 percent, matching the fastest pace since 2008.

Thirty five percent of economists foresaw additional easing from April to June and another 35 percent bet it will be in the following three months, according to a Bloomberg News survey last month.

Etsuro Honda and Koichi Hamada, economic advisers to Abe, said last month that May will be a critical time for the Bank of Japan to decide whether additional easing is necessary.

While sentiment among large Japanese manufacturers in yesterday’s Tankan report rose to 17, the highest level since 2007, the gain may be short-lived as the index is forecast to fall to 8 in June.