Japan's Slipping Inflation Points to Longer Road Ahead for BOJBy
Economists push back projections for policy normalization
Yet questions remain about likelihood of hitting 2% target
A second straight drop in Japan’s inflation rate points to an even longer road ahead for the Bank of Japan.
The nation’s key inflation gauge showed that price gains slowed in April, to 0.7 percent when excluding fresh food -- not even halfway to the BOJ’s 2 percent target. Prices for energy and mobile phones were cited as the primary factors in the first back-to-back decline in core CPI since April 2016.
"What recent price data have been increasingly showing is that it will take a while longer for the BOJ to hit the price target," said Norio Miyagawa, a senior economist at Mizuho Securities Co.
The yen was little-changed after the inflation figure was announced. Economists expect inflation to rebound moderately during the second half of the year, thanks to higher energy prices and modestly rising wages. The output gap, a broad measure of supply and demand, points to rising capacity shortages that should support capital investment.
Yet BOJ Governor Haruhiko Kuroda’s communication challenge looks to become more difficult.
Kuroda will likely be forced to explain the weakness in underlying inflation, according to Nobuyasu Atago, chief economist at Okasan Securities Co. and former head of BOJ’s price-statistics division.
"The BOJ may have missed the boat on moving toward policy normalization in the next few years," Atago said.
Of course, things will be much easier for Kuroda if global demand drives a rebound in Japan’s exports and economic growth. But private economists are pushing back their forecasts for when the BOJ will begin normalizing policy, even as few say the BOJ can keep going forever -- or achieve 2 percent inflation in coming years.
The BOJ’s policy framework is widely thought to be both at the limits of its powers and producing diminishing returns. The question is how long the BOJ can keep its policy settings unchanged as global yields rise and the size of its asset holdings nears that of Japan’s economy.
One problem for the BOJ is that inflation still largely depends on external factors such as oil prices and the yen’s exchange rate. Services inflation remains largely flat over the longer term.
“Oil prices are rising and so CPI may pick up again down the road, but prices excluding oil continue to be very steady," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. "The overall upward momentum of prices is pretty weak and that means that the BOJ will have to maintain the current policy."
Another problem has been consumer spending. Rising prices, particularly for vegetables, had eaten into paychecks during the first quarter, contributing to the first contraction in the economy in two years.
"Households were discouraged by a surge in vegetable prices in the first quarter but that’s gone and household spending should recover this quarter, making it easier for companies to boost prices," said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co.
— With assistance by Russell Ward, Yoshiaki Nohara, and Yuko Takeo