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BOJ seen deploying price forecasts as tool in fighting deflation: analysts

Bloomberg

As the Bank of Japan 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 financial newspaper reported last week. The BOJ may upgrade its view on core price gains to at least 1.5 percent for the year ending March 2015, sources familiar with officials’ discussions have said.

BOJ Gov. Haruhiko Kuroda, who this week oversees his second board meeting, says stoking inflation expectations can unlock pentup 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.”

Any forecast for price gains in fiscal 2015 is likely to be 2 percent, matching the BOJ’s target, according to five out of six economists in a Bloomberg News survey. The bank has yet to indicate whether it will release such a projection.

The highest forecast since the BOJ began releasing estimates in 2000 was 1.8 percent for fiscal 2008.

The 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.

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.”

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

Yoshinoya Holdings Co., owner of a restaurant chain serving “gyudon,” bowls of beef on rice, this month cut the price of its regular-size meals to ¥280 from ¥380.

BOJ policymaker Ryuzo Miyao said last week that inflation may approach 2 percent in or after the fiscal year starting April 2014. With none of the economists surveyed by Bloomberg forecasting additional easing at the BOJ 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 the BOJ may be forced to loosen further if prices don’t start rising by October, when it will release its next outlook report.