BOJ's Inflation Success Seen Fading as U.S., Germany Advance

  • Bond market shows falling expectations for Japanese inflation
  • Economists say BOJ won't meet 2% target in present time frame

A record asset-purchase plan brought inflation in Japan into line with its peers in the Group of Seven nations over the past few years. A key measure in the bond market indicates Japan may be moving away from the pack again.

The break-even rate -- which measures the difference between yields on regular bonds and inflation-linked debt -- shows investors think prices in Japan will increase by an average 0.768 percent annually over the next 10 years. The rate’s been falling in Japan since May, while it has started to rise over recent months in most G-7 economies.

That supports the view of economists surveyed by Bloomberg, who almost all see no chance of the Bank of Japan achieving its goal for 2 percent within its latest time frame that runs until around March 2017.

“The gravitational pull against rising inflation expectations is stronger in Japan than other countries after the prolonged period of deflation it went through,” said Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo. “Kuroda will eventually have to admit that expectations aren’t going to rise to meet the 2 percent target.”

Note: Japan excludes sales-tax hike impact

While Governor Haruhiko Kuroda has helped drive company profits and share prices higher, he has his work cut out for him in convincing the bond market.

And businesses have yet to pour earnings back into investment and wages fast enough to help reach the price target. According to the BOJ’s Tankan survey, companies on average expect prices to rise about 1.2 percent a year from now, down from a previous estimate of 1.4 percent.

The central bank’s preferred measure, which strips out fresh food costs, fell 0.1 percent in September.

Kuroda has indicated he sees an underlying trend of rising prices in Japan, while also saying he won’t hesitate to adjust policy if needed.

All 41 economists polled by Bloomberg expect the BOJ will leave monetary policy unchanged at a two-day meeting that ends Thursday.

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