BOJ Cuts Inflation Forecast While Keeping Stimulus Unchanged

The Bank of Japan kept its stimulus policies unchanged while lowering its inflation forecast, underscoring that any exit from its unprecedented monetary easing remains far away.

The central bank will continue to use its two policy rates and asset purchases to spur prices higher, it said in a statement Thursday. The decision was expected by almost all economists surveyed by Bloomberg. The BOJ made a small increase to its growth forecasts for this fiscal year and next.

While global demand is supporting exports and contributing to modest economic growth, four years of extraordinary monetary stimulus is generating only the smallest of increases in prices. Governor Haruhiko Kuroda said last week that the accommodative policy and asset purchases will continue for some time because inflation is "quite sluggish," underscoring how far the BOJ lags behind its counterparts in the U.S. and Europe.

"The forecasts didn’t change much but reading between the lines of the statement you can see their rising confidence," said Maiko Noguchi, senior economist at Daiwa Securities and a former central bank official. "The divergence between their price outlook and that of private economists continues, but it shouldn’t be a big problem for now because it’s been that way for a long time and few economists believe the BOJ’s projections."

In its quarterly outlook report, the BOJ cut its inflation projection for the fiscal year that started this month to 1.4 percent from 1.5 percent. The central bank continued to say it will hit the price target around fiscal 2018, which starts next April.

While this indicates the BOJ’s broad scenario hasn’t changed from three months ago, Kuroda said at a post-decision briefing that CPI probably won’t stabilize above 2 percent until after fiscal 2018.

Policy differences

While the BOJ’s goals are distant and Kuroda’s term as governor is due to end in April next year, the Federal Reserve is increasing interest rates and policy makers at the European Central Bank, who meet later Thursday, have been debating tapering their stimulus program.

Kuroda said it’s premature to be discussing an exit by the BOJ now, which would only serve to confuse markets. He added that 2 percent inflation must be met first and the BOJ will communicate properly about an exit when the time comes.

Still, analysts surveyed by Bloomberg do expect that the BOJ’s next step will be tightening, rather than further easing of its policy. This is because many expect consumer prices to pick up somewhat later this year, thanks to rising oil costs and the relatively weak Japanese yen.

Japan’s economy is turning toward a moderate "expansion," the bank said. That was the first time they’ve used the word in this context in about nine years. Exports and industrial output are on an increasing trend, according to the BOJ. However, the bank’s statement also said that risks to both prices and economic activity were "skewed to the downside" and that momentum toward the 2 percent inflation target isn’t sufficiently firm yet.

"It doesn’t make sense that the BOJ upgraded its GDP outlook because domestic demand hasn’t recovered remarkably," said Atsushi Takeda, an economist at Itochu Corp. in Tokyo, who expects the bank to keep policy unchanged for the time being.

Updated Estimates

Below are new projections of economic growth and inflation by the BOJ. They are the median estimates of the nine board members. The inflation forecasts exclude the effect of the planned sales tax increase in fiscal 2019.

• Inflation forecast for fiscal 2017: 1.4 percent (previous 1.5 percent)
• Inflation forecast for fiscal 2018: 1.7 percent (previous 1.7 percent)
• Inflation forecast for fiscal 2019: 1.9 percent
• Growth forecast for fiscal 2017: 1.6 percent (previous 1.5 percent)
• Growth forecast for fiscal 2018: 1.3 percent (previous 1.1 percent)
• Growth forecast for fiscal 2019: 0.7 percent

— With assistance by Russell Ward, Andy Sharp, Yoshiaki Nohara, Kazunori Takada, Tomoko Sato, and Keiko Ujikane