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BOJ struggles to convince on 2% as ‘Abenomics’ shine dims

Meeting inflation target stymied by slow progress in growth strategy

by Masahiro Hidaka

Bloomberg

Half a year after Bank of Japan Gov. Haruhiko Kuroda unleashed record monetary easing, economists see the bank failing to meet its inflation target, underscoring the case for stronger steps to revive the economy.

While the median estimate of BOJ Policy Board members released last week showed the bank expects consumer prices to rise 1.9 percent in fiscal 2015 — in line with a goal of 2 percent in two years laid out in April — just two of 34 analysts surveyed by Bloomberg News see the target met in that time frame.

With the BOJ seen standing pat on the pace of asset purchases until it can assess the impact of the consumption tax hike due next April, the onus is now on the administration to sustain confidence in the “Abenomics” project. Prime Minister Shinzo Abe has yet to introduce legislation such as corporate tax cuts that companies have advocated to boost Japan’s potential.

“Progress on the growth strategy has been slow,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. “If the delays continue, foreign investors could lose confidence in Abenomics, and stocks could fall.”

The benchmark Topix index — still the best performer among 24 developed stock markets this year — trailed counterparts last month, signaling waning enthusiasm with Abenomics. The Topix advanced less than 0.1 percent.

Fifteen of the economists surveyed said the lack of bolder steps on the growth strategy is undermining the central bank’s reflation campaign.

Growth slowed to an annualized 2.1 percent in the three months through September from 3.8 percent the prior quarter, Nomura Securities Co. estimated. BNP Paribas SA said the expansion likely slumped to 1.7 percent.

Abe said the current extraordinary Diet session would be one for “getting things done,” reflecting a focus on pushing through legislation for his growth strategy — the “third arrow” of his Abenomics project.

On the table are steps to encourage corporate restructuring to boost industrial competitiveness and the introduction of zones for deregulation in fields from medical treatment to urban development. The Cabinet on Tuesday approved the special zone bill, economy minister Akira Amari told reporters.

The yen’s slide of about 12 percent against the dollar this year has induced nascent inflation by boosting import costs. Yet price gains remain distant from the BOJ’s target, with core prices excluding fresh food, the bank’s key gauge, rising 0.7 percent in September from a year earlier.

Regular wages excluding overtime and bonuses fell for the 16th straight month in September, showing the potential squeeze on households should inflation become embedded.

The 3 percentage point increase in the sales tax next year is set to cause an annualized 4 percent contraction in the second quarter even as Abe prepares ¥5 trillion in stimulus to cushion the blow. A further two-point rise to 10 percent is scheduled for October 2015.

Japan needs fresh demand to offset the restrictive fiscal policy, and Abe comes up short when it comes to measures to spur business investment, said Takuji Okubo, chief economist at Japan Macro Advisors.

The scale and speed of efforts to remove international trade barriers, lower corporate taxes and deregulate are inadequate, he said.

“If the growth strategy continues to lag, the economy will turn down in April and I wouldn’t be surprised if stock prices started to fall heavily,” said Okubo, who formerly worked at Goldman Sachs Group Inc.

The BOJ in April said it would double the monetary base in the next two years by stepping up purchases of government bonds and other financial assets. The measure stood at ¥189.8 trillion at the end of October, up 45.8 percent from a year earlier, the BOJ said Tuesday. It forecast in April that the monetary base will increase to ¥270 trillion by the end of 2014.

Board members Takehiro Sato and Takahide Kiuchi said last week the median 1.9 percent price view, which strips out the effect of the sales tax increases, was too optimistic. Sayuri Shirai, another BOJ policymaker, urged the bank to more clearly reflect downside risks in its outlook report.

The BOJ should be prepared to ease further if growth plunges more than expected, Etsuro Honda, a top economic aide to Abe, said in an interview last week.