Bank of Japan policymakers are divided over whether the central bank can meet its inflation target in two years, underlining concerns it has set an unrealistic goal in its battle to end 15 years of deflation despite plans for a massive burst of monetary stimulus.
The central bank held off on offering any fresh policy initiatives following the April 4 policy meeting, when new Governor Haruhiko Kuroda stunned markets by promising to inject about $1.4 trillion into the economy to hit the 2 percent inflation target in roughly two years. The BoJ's semi-annual economic report, which is based on forecasts from the BoJ board's nine members, showed the degree to which other policymakers share Kuroda's view.
Their median forecast shows they expect core consumer inflation, the central bank's preferred gauge for price trends, to reach 1.9 percent in the year to March 2016, close to the bank's target. But the forecasts of the board members ranged widely, from 0.8 percent to 2.3 percent. And while the BoJ officially said it expected to achieve 2 percent inflation towards the latter half of its projection period out to March 2016, board members Takahide Kiuchi and Takehiro Sato dissented against that view, underlining the division in the board.
"The BoJ's inflation forecast is quite ambitious and probably pretty hard to achieve," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo. "There's no guarantee that by expanding base money, the BoJ can heighten inflation expectations," he said. "It would be tough to achieve 2 percent inflation in Japan with monetary easing alone."
A gap in the views of future inflation poses a dilemma for the BoJ because its policy relies so much on shaping market and public expectations, or trying to nudge people into spending more on the belief that prices will finally start to rise in the future. In a reminder of the task ahead, data on Friday showed core consumer prices fell from a year earlier for the fifth straight month in March, even as the yen's recent fall pushed up import costs. Core prices, which include all items except for volatile food costs, fell 0.5 percent.
Kuroda has vowed to do whatever it takes to achieve its price target in two years, putting the central bank's reputation on the line to restore an inflation level that has rarely been hit since the early 1990s. The BoJ's median projection is much higher than the forecasts of 10 private-sector economists gathered in a Reuters poll this week. The poll shows a median forecast for core inflation of around 1 percent in 2015/16, almost half the BoJ readout.
A lack of progress in meeting the target may undermine public expectations of future price moves and force the BoJ into taking further monetary action despite unleashing the world's most intense burst of monetary stimulus earlier this month, some analysts say. "When the BoJ updates these forecasts again, there could be speculation that it will increase debt purchases again because it won't be close to meeting its target," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.
"With yields already so low, this could make banks afraid to buy more government debt." The BoJ reiterated its pledge to expand base money, its new policy target, at an annual pace of 60 trillion yen ($604 billion) to 70 trillion yen. Base money is the combined amount of cash and deposits parked with the central bank. "Personally, I think many on the board feel that inflation will reach around 2 percent in the first half of fiscal 2015," Kuroda told reporters, referring to the year to March 2016.
The BoJ report forecast stronger economic growth in the next few years than it had projected in January and higher inflation. It suggested that the fall in the yen, as Prime Minister Shinzo Abe has pushed through aggressive policies to lift the economy, will boost exports and put upward pressure on nominal wages. Higher wages are critical to getting Japanese consumers spending again after years of deflation.
"Quantitative and qualitative monetary easing is expected not only to work through such transmission channels as long-term interest rates and asset prices, but also to lower real interest rates through a pickup in inflation expectations," the BoJ said in its report.
The BoJ forecasts that core consumer inflation, excluding the impact of an expected hike in the national sales tax, would reach 1.4 percent in 2014/15, higher than its January projection of 0.9 percent. A Reuters poll this week of 10 analysts showed most of them expect core CPI to rise around 0.5 percent in the year to March 2015, about a third of the pace projected by the BoJ. The poll's forecasts also excluded the expected hike in the sales tax.
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