Years After BOJ Shock-and-Awe, Inflation to Fall Short

Updated on

Three years from now, price gains may still fall short of the Bank of Japan's 2 percent inflation target, set in 2013, a survey of economists by Bloomberg News shows.

Consumer prices will rise an average 1.4 percent the fiscal year through March 2017, after failing to reach 2 percent -- stripped of fresh food and a sales-tax boost -- in any of the years since the goal was set, the median of 16 estimates shows. Governor Haruhiko Kuroda wanted to get there in about two years when he unleashed his record stimulus plan in April 2013.

Japan, the first major developed nation to battle deflation since the 1930s, has debated whether and how to boost prices since they started dropping in the 1990s. Sustained failure to reach the target would undermine an argument by Kuroda and one of his two deputies that monetary policy alone could do the job.

“The BOJ’s monetary stimulus was enough to pull CPI to a positive from a negative, but it’s not enough to achieve the 2 percent inflation goal stably,” said Tomo Kinoshita, chief economist at Nomura Holdings Inc., the nation’s largest securities company. CPI is the consumer-price index.

While Kuroda’s campaign -- which has seen the BOJ’s balance sheet dwarf that of counterparts relative to the size of the economy -- has spurred bank lending to the biggest jump in two decades and seen the end of outright deflation, it has yet to spark pay rises big enough to secure the 2 percent CPI target.

“It’s necessary to create an environment where wages rise sustainably,” said Kinoshita.

Defining Success

Investors are losing faith in Japan’s revival, according to the Bloomberg Global Poll. Financial professionals are the most bearish on the country and its leaders since 2012 after a renewed recession last year and mounting deflation concerns, the survey showed.

The central bank Wednesday releases its own updated projections for the economy, with Kuroda holding a press briefing. The BOJ board is forecast to keep its stimulus program unchanged on Wednesday.

Part of the challenge for officials is how to define success. The BOJ, in a move Kuroda endorsed after taking the helm in March 2013, set an ambitious target in deciding on 2 percent inflation -- a pace not sustained since the early 1990s. By its previous determination of price stability of around 1 percent gains, the central bank would be on the verge of victory.

Corporate Hesitation

At issue is how to encourage companies and households to step up spending and be willing to borrow to fund investment -- bringing an end to what Prime Minister Shinzo Abe calls a “shrunken mindset.” Kuroda said in a February 2013 interview that deflation pushed up the real burden of debt and caused companies and households to put off spending. A 2 percent goal was “appropriate,” he said.

While Japan’s companies have boosted wages, the gains have been limited relative to the surge in their profits and stock prices that has accompanied the BOJ’s stimulus. And capital spending data suggests continued doubts among executives that the world’s third-largest economy has fully turned its back on two decades of stagnation -- the level remains below levels reached before the 2009 global recession.

Excluding the effect of a 3 percentage-point sales-tax increase last April, core consumer prices, which omit fresh food, rose 0.7 percent in November from a year earlier. After halting declines in May 2013, the month after Kuroda announced his easing program, increases in the BOJ’s preferred measure sped up until May 2014 before slowing again.

Wages Fall

“The reason prices don’t rise is because wages don’t go up,” Hiromichi Shirakawa, economist at Credit Suisse Group AG who formerly worked at the Bank of Japan. “There is no change to the fundamentals that it is difficult for prices to rise” in Japan.

Monthly changes in base wages in the 12 months through March 2014 averaged a drop of 0.5 percent from year-earlier levels, the same pace of decline over the previous decade, according to data compiled by Bloomberg. Including bonuses, total pay did rise, by 0.1 percent on average each month last fiscal year, though the gains haven’t sufficient to generate the wage-price spiral that policy makers have sought. BOJ officials are looking for about a 1 percent gain in base wages in the fiscal year that starts April 1, roughly double the advance estimated for this year.

Nationwide figures for wages have stayed subdued even in the context of a shrinking labor force, as Japan’s population ages and contracts.

Factory Jobs

While there are anecdotes of employers forced to boost pay to attract scarce labor, and the number of job offers now exceeds applicants by the most since 1992, a key challenge is that much of the employment growth is coming from part-time positions. The ratio of part-timers among all employees reached 30.09 percent in November, the highest level in Labor Ministry data going back to 1990.

Manufacturers, which have benefited from the export competitiveness generated by a weaker yen, have been limited in their hiring. The number of jobs in the sector was 10.19 million in November, matching the lowest level since December 2012, when the figure hit a level unseen since 1961.

“It will take more time” to realize wage-driven inflation, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who previously worked at the central bank. By late in the 2016 fiscal year, there’s a chance that Japan reaches 2 percent, he said. Sustained corporate profit gains, further tightening in the job market and some rebound in energy costs “will put wage bargaining power in the favor of labor,” he said.

Kuroda’s Faith

Kuroda, a 70-year-old ex-Finance Ministry bureaucrat who ran the Asian Development Bank before his current post, was long an advocate of stoking inflation. In 2002, he proposed a 3 percent target. And he has differed from previous BOJ chiefs, who had flagged limits to the ability of monetary policy to end deflation.

“Monetary policy alone can achieve the 2 percent price target,” Kuroda said in a parliamentary hearing on his nomination for governor on March 11, 2013. “The BOJ is responsible for achieving the 2 percent inflation target and it can do it.”

Weeks later, he set a target of doubling the supply of base money, a move that helped drive down the yen and pull Japan out of what Kuroda has characterized as 15 years of deflation.

Price Outlook

The reflation efforts were countered last year by Abe’s decision to proceed with the sales-tax bump, which contributed to tipping the economy into its fourth recession since 2008. At the end of October, Kuroda led a divided board to expand stimulus, bringing the annual objective for increasing base money to 80 trillion yen ($682 billion).

Core consumer prices will rise 0.8 percent in the fiscal year through March 2016, according to this month’s survey of economists by Bloomberg.

What elevates the importance of compensation increases is a weakening in other sources of price pressures. The exchange rate may be stabilizing after three years of decline in which the yen lost 36 percent against the dollar.

Meantime, energy costs are now cheapening, after a surge sparked by the falling yen and jump in fossil-fuel imports thanks to nuclear-power shutdowns. Analysts at banks including HSBC Holdings Plc are flagging the risk that the measure dips back into declines by mid-year, thanks to cheaper oil.

“With its credibility on the line, the central bank is unlikely to extend the timeline for 2 percent inflation out further before depleting all the tools in its arsenal,” Izumi Devalier, an HSBC economist in Hong Kong, wrote in a Jan. 19 note. She anticipates further BOJ stimulus as soon as April, after a disappointing annual round of wage talks.

(Updates with Bloomberg Global Poll in seventh paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE