Bloomberg News

BOJ Seen Deploying Price Forecasts as Tool Against Deflation

April 23, 2013

BOJ Governor Haruhiko Kuroda

Haruhiko Kuroda, governor of the Bank of Japan. While Kuroda has pledged to do “whatever it takes” to end 15 years of deflation, not everyone is convinced. Photographer: Tomohiro Ohsumi/Bloomberg

As the Bank of Japan (8301) prepares to boost its inflation forecasts this week, analysts from Goldman Sachs Group Inc. to JPMorgan Chase & Co. say the estimates may themselves be used as a tool for ending deflation.

The BOJ may indicate that its 2 percent inflation target will be reached by spring 2015, the Nikkei newspaper reported April 18. The central bank may upgrade its view on core price gains to at least 1.5 percent for the year ending March 2015, people familiar with officials’ discussions previously told Bloomberg News.

Central bank Governor Haruhiko Kuroda, who this week oversees his second board meeting, says stoking inflation expectations can unlock pent-up demand and spur credit growth by alleviating concern real debt burdens will rise. The BOJ risks losing credibility unless prices stop dropping in coming months, with a key gauge showing a 0.3 percent decline in February and analysts estimating another fall in March.

“It’s a confidence game,” said Masamichi Adachi, senior economist at JPMorgan in Tokyo and a former BOJ official. “The BOJ is trying to use its inflation forecast to convince markets that they can achieve the 2 percent inflation target in two years, even though some market participants may feel this is unrealistic.”

Matching Target

Any forecast for gains in the benchmark measure, which excludes fresh food, in fiscal 2015 is likely to be 2 percent, matching the central bank’s target, according to five out of six economists in a Bloomberg News survey.

The BOJ is yet to indicate whether it will release such a projection. The highest forecast since the central bank began releasing estimates in 2000 was 1.8 percent for fiscal 2008.

In a sign of the challenge ahead, the Organisation for Economic Co-operation and Development today estimated that prices excluding fresh food and energy will increase only about 0.5 percent in the final quarter of 2014, excluding the effects of a planned sales-tax increase.

The OECD today raised its forecasts for Japan’s growth this year and next to 1.4 percent from previous estimates of 0.7 percent and 0.8 percent respectively.

It also said that it’s crucial for the nation to reverse a rise in the ratio of debt to gross domestic product, which the OECD projects will reach 232.6 percent next year. Steps include controlling social security expenditure and substantial tax increases, the Paris-based organization said.

Weaker Yen

The central bank’s commitment to its price goal should help keep the yen at a weaker level and support the Nikkei 225 Stock Average, Mansoor Mohi-uddin, head of foreign-exchange strategy at UBS AG in Singapore, wrote in a note to clients.

The yen strengthened today and stocks fell after weaker- than-forecast China manufacturing data. The yen was at 98.66 per dollar at 6:02 p.m. in Tokyo, up 0.6 percent and paring its decline of the past six months to about 19 percent. The Nikkei 225 slid 0.3 percent after yesterday closing at the highest level since July 2008.

While Kuroda has pledged to do “whatever it takes” to end 15 years of deflation, including doubling the nation’s monetary base, not everyone is convinced.

“Two percent inflation is all but impossible to achieve in two years” under the current policy framework, Naohiko Baba, chief economist at Goldman Sachs in Tokyo. said last week. “We see upward revisions to the price outlook purely as attempts to influence the expectations of the market and economic agents.”

Beef Bowls

Prices haven’t risen for 10 months, with data due on the day of the next BOJ board meeting set to show a 0.4 percent decline the core measure in March, according to economists’ median forecast.

Yoshinoya Holdings (9861) Co., owner of a restaurant chain serving bowls of beef on rice, this month cut the price of its regular- sized meals to 280 yen ($2.81) from 380 yen.

BOJ board member Ryuzo Miyao said last week that inflation may approach 2 percent in or after the year starting April 2014. With none of the economists surveyed by Bloomberg forecasting additional easing at the central bank’s meeting this week, analysts will focus on the price outlook.

A median forecast below 1.5 percent for fiscal 2014 could spark speculation that more easing is needed, according to Nomura Holdings Inc. JPMorgan’s Adachi said that the BOJ may be forced to loosen further if prices don’t start rising by October, when it will release its next outlook report.

Everything Possible

Kuroda told reporters this month that the central bank has taken all “necessary” and “possible” measures to achieve the price target. Some Bank of Japan board members consider it infeasible to expand government-bond purchases beyond what was announced this month, according to people familiar with the central bank’s discussions who asked not to be identified because the talks were private.

The price forecast will be a “de facto propaganda tool,” Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, said in a report on April 19, adding that bullish estimates could undermine market confidence in the report.

Prime Minister Shinzo Abe’s pledges for monetary easing triggered a slide in the yen and boosted exporters such as Toyota Motor Corp. (7203) and Kubota Corp. (6326), a tractor maker. Now, the government faces the challenge of sustaining growth while wrestling with the world’s biggest government debt burden, a declining population, labor market restrictions, and stagnant wages. Salaries fell 0.8 percent in February.

Goldman Sachs Asset Management Chairman Jim O’Neill said in Tokyo last week that the BOJ can achieve its 2 percent target -- provided it is truly committed to doing so.

To contact the reporter on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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