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Game of chicken hits stimulus calls

Assured BOJ foils analysts’ predictions

by Toru Fujioka and Masahiro Hidaka

Bloomberg

The confidence that Bank of Japan officials are demonstrating in achieving their inflation target is lowering the chances of additional monetary easing this year even as the economy weakens.

Consumer prices excluding fresh food but not energy will increase 1.9 percent in the fiscal year starting April 1, 2015, and 2.1 percent the following year, according to the median estimates of BOJ Policy Board members in a quarterly outlook released Wednesday.

BOJ Gov. Haruhiko Kuroda said the timing for hitting the BOJ’s 2 percent goal hasn’t been pushed back at all.

The sureness — in the face of continued declines in base wages, weaker-than-anticipated industrial production and diminished price pressures from energy costs — spurred economists at Itochu Corp. and Societe Generale SA to abandon forecasts for expanded BOJ stimulus this year.

The central bank’s predictions raise the stakes for Kuroda should the economy fail to pick up in the second half of the year.

“Considering the outlook report, lower growth alone won’t be enough to trigger extra easing,” said Itochu economist Yoshimasa Maruyama. “We’re pushing back our forecast for the timing of more stimulus to the first quarter of next year from as early as July.”

Since taking the helm of the BOJ, Kuroda has wrong-footed economists in their predictions for additional easing. As of May last year, 65 percent predicted a move within 2013, according to the Japan Center for Economic Research. October 2013, April 2014 and then July 2014 have, in their turn, been favored months for those forecasting extra loosening.

On Wednesday, the BOJ stuck with its plan to achieve an annual increase in Japan’s monetary base of between ¥60 trillion and ¥70 trillion ($683 billion).

While the BOJ trimmed its growth estimate for the current fiscal year, Kuroda said a setback to the economy from the first of two scheduled sales tax hikes has been within expectations, with consumer spending solid and employment improving. A virtuous cycle in which rising production, incomes and spending fuel economic expansion will continue, with growth set to exceed its potential, he said.

Inflation will accelerate from 1.3 percent this year, according to the median forecasts of the Policy Board. The economy will expand 1.1 percent in the fiscal year that began last month — less than its 1.4 percent forecast in January — and grow 1.5 percent next year and 1.3 percent in the following 12 months, according to the estimates.

The BOJ is monitoring the economy’s performance after the 3 point consumption tax hike on April 1 that’s projected to trigger a contraction in the April-June quarter due to weak consumption. The increase is aimed at helping rein in the world’s biggest debt burden.

The Nikkei 225 stock average has been the worst performer among major global stock market indices this year, with a four-month slide through April signaling fading expectations for Prime Minister Shinzo Abe’s “third arrow” of “Abenomics,” his deflation-busting strategy aimed at improving economic efficiency and bolstering long-term growth once stimulus fades.

A gauge of Japan’s manufacturing activity tumbled in April to its lowest level since February 2013, according to data released Wednesday. Industrial production in March rose 0.3 percent from the previous month, less than the 0.5 percent gain forecast in a separate survey of economists by Bloomberg.

Households are getting squeezed by the higher sales tax as incomes stagnate. Tokyo’s consumer prices excluding fresh food but not energy rose 2.7 percent in April, the fastest pace since 1992, boosted by the higher levy. Wages excluding overtime pay and bonuses fell for a 22nd straight month in March, dropping 0.4 percent from a year earlier.

“It’s possible the consumption tax will be a drag for a prolonged period as wage growth isn’t catching up with inflation,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. “July will be key for the BOJ to judge if additional stimulus is needed.”

Citigroup economists Kiichi Murashima and Naoki Iizuka said they see extra easing sometime during or after this autumn, pushing back a previous call for a move in June or July.

Kuroda said the BOJ expects the inflation target to be reached in fiscal 2015. In previous statements, he said the goal would be achieved sometime in a period running from mid- or late fiscal 2014 through fiscal 2015.

Comments from the governor underscored the range of views on the Policy Board. Kuroda said Takahide Kiuchi and Takehiro Sato opposed saying price gains would reach 2 percent, while Sayuri Shirai said the goal would be achieved toward the end of the projection period through March 2017.

The BOJ’s inflation forecasts for this and next fiscal year matched its estimates in January. The projections are the median estimates of the nine board members and exclude the effects of sales-tax increases.

“We will adjust policy without hesitation as needed, examining risks at each policy meeting,” Kuroda said at a press conference. “Various risks remain to the upside and downside, especially in overseas economies.”