Japan Inc. Inflation Expectations Sag, Feeding BOJ Struggle

Japanese companies trimmed their forecasts for inflation for coming years, underscoring the difficulty Bank of Japan Governor Haruhiko Kuroda faces as he struggles to hit the central bank’s price target of 2 percent.

The BOJ’s survey of companies’ average inflation outlook shows:

  • Japanese companies forecast inflation of 0.6 percent in one year, compared with 0.7 percent forecast in a June survey.
  • Companies expect 1 percent inflation in three years, down from 1.1 percent projected in June.
  • Companies also see 1 percent inflation in five years, compared with a 1.1 percent estimate in the previous survey.

The price outlook among companies contrasts with the BOJ’s. The central bank has said inflation will reach its 2 percent target during the fiscal year ending in March 2018. Consumer prices excluding fresh food fell for a sixth straight month in August, by 0.5 percent, and the BOJ’s Tankan survey of corporate sentiment released on Monday showed large manufacturers were the least optimistic in more than three years.

“The report signals that the BOJ hasn’t been doing enough to stoke inflation expectations,” said Kyohei Morita, chief Japan economist at Barclays Plc in Tokyo. “Companies will probably need to revise down their currency projections to reflect the actual level of the weaker yen, weighing on their inflation expectations further and posing a risk of slower pay increases during wage talks next spring.”

Large manufacturers forecast that the yen will trade at an average of 107.92 versus the U.S. dollar in the year through March 2017, compared with 111.41 in the previous survey. The yen traded at 101.97 against the dollar as of 9:43 a.m. in Tokyo.

“Inflation expectations are a sort of a missing piece at the moment. So the BOJ will probably ease further at its next meeting to demonstrate they will try to work on spurring inflation expectations and enhancing the credibility of its inflation-overshooting commitment,” Morita said.

The BOJ will hold a policy meeting on Oct. 31 and Nov. 1. At the previous meeting on Sept. 21, the central bank shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates, pledging to pin benchmark 10-year yields around zero. The central bank strengthened its forward guidance by pledging to continue expanding the monetary base until inflation is stable above the 2 percent target -- committing to an overshoot of consumer-price gains in an effort to revive inflation expectations.

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