Business / Economy

BOJ under pressure to ease further

G-20 worried about sluggish global growth

by Yoshio Takahashi


With financial chiefs from the Group of 20 major economies vowing to boost global growth at their meeting this week, pressure is building on the Bank of Japan to take additional monetary easing steps to invigorate the country’s sluggish economic recovery.

BOJ Gov. Haruhiko Kuroda has yet to alert the market to extra steps, saying that the BOJ is on course to meet its inflation target and that the economy is expected to continue its moderate recovery trend.

But economists warn that recent economic data suggests prices are unlikely to rise as much as the BOJ expects, while the second stage of the sales tax hike to 10 percent next year could hamper Japan’s return to growth.

If additional measures become necessary, they would need to be taken at the right time to fulfill its share of the G-20 goal — boosting collective gross domestic product by 2 percent by 2018.

The 20 members agreed Friday at the meeting in Washington to work out details of an initiative to spur global investment in an effort to hit the 2 percent growth objective.

The G-20 groups Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States and the European Union.

On the same day, U.S. Treasury Secretary Jack Lew said in a statement at a related meeting that Tokyo needs to raise domestic demand, as the world’s third-biggest economy faces “the twin challenges of deflation and weak growth for some time.”

At a press conference after the G-20 meeting, Finance Minister Taro Aso said he is “neither optimistic nor pessimistic” about Japan’s economic outlook.

“There is a chance that the BOJ will have no choice but to take some measures by the end of 2014,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The BOJ embarked on drastic easing measures a year and a half ago to achieve its ultimate goal of raising inflation to 2 percent within two years to halt nearly two decades of deflation.

Economists are becoming increasingly skeptical about that outlook because they expect the rise in gasoline prices to slow, and consumer spending to stay weak in light of the April consumption tax hike, which will likely curb price gains in the coming months.

The BOJ prefers to gauge inflation by the core consumer price index, which excludes volatile prices of fresh food but not energy. For August, the core CPI rose 3.1 percent compared with a year earlier, which was below the range of 3.2 percent to 3.4 percent logged in the previous four months.

These numbers reflect the impact of the April consumption tax hike to 8 percent from 5 percent, which the BOJ estimates raised the core CPI by about 2 points.

The central bank says the uptrend will pick up in October once the effect of an energy cost surge that kept year-earlier price levels relatively high until September 2013 starts to fade.

But the price outlook was further clouded by a BOJ survey last week that showed Japanese firms expect the rise in consumer prices will still be 1.5 percent in a year, well below the BOJ’s 2 percent target.

Credit Suisse projects the pace, excluding the impact from the tax hike, to fall below 1.0 percent in the October-December quarter, contradicting the BOJ’s projection for it to stay above that level.

The fresh drop in the yen, which briefly sank to its lowest value in over six years against the dollar last month, will push up import costs but take six to eight months to be reflected in the price index, says Junichi Makino, chief economist at SMBC Nikko Securities Inc.

He expects the BOJ to decide on further stimulus at its policy meeting from Dec. 18 to 19.

Once the government decides to go ahead with the doubling of the consumption tax to 10 percent, it will likely pressure the BOJ into additional easing to soften the impact, economists said.

The government may have to rely on another monetary push because efforts to restore Japan’s fiscal health, the worst among all advanced economies, will leave it little room for drastic spending to underpin the economy.

Prime Minister Shinzo Abe is to make the final decision on the second stage of the tax hike by the end of the year. If he gives the green light, it will hit 10 percent in October 2015.

The damage to the economy from the April tax hike is evident. Japan’s GDP shrank by an annualized real 7.1 percent in the April-June quarter, marking the biggest drop since the global financial crisis unfolded in 2008.

Even if Abe puts off the tax hike, the BOJ still could be urged to support the economy because retracting the plan could also signal that economic conditions under “Abenomics” are quite fragile, Norinchukin’s Minami said.

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