When Bank of Japan Gov. Haruhiko Kuroda met the press last week after the BOJ’s policy meeting, he effectively admitted the central bank may miss what the market perceives as its deadline of next fiscal year for achieving 2 percent inflation to revive the economy.
But Kuroda also downplayed concern about that prospect, underscoring the bank’s commitment to addressing what he dubs people’s deflationary mindset by enhancing their inflation expectations, while also expressing hope that upcoming labor negotiations will yield decent wage increases.
The current BOJ policy is to “alter public expectations” whatever it takes, a person close to the bank’s thinking said, adding that to that end, it will even “ignore” whether its policy is seen as balanced or reasonable.
The central bank has said it is expecting to achieve a 2 percent rise in consumer prices “in a period centered on fiscal 2015,” which starts April 1. It has also said it is seeking to hit the inflation goal “around two years” after the introduction of its monetary stimulus in April 2013. But it has not specified an exact deadline.
On Wednesday, Kuroda for the first time acknowledged the BOJ may not be able to achieve the goal within fiscal 2015, with analysts seeing his remarks as admitting failure and extending the apparent deadline for about a year.
Still, Kuroda said surveys BOJ officials follow have signaled that “medium- to long-term inflation expectations (among consumers and business managers) are generally being maintained.”
“I believe the conversion of people’s deflationary mindset is progressing steadily,” he said.
The BOJ has also said, meanwhile, that the consumer price index is being dragged down in the short term by sharp falls in crude oil prices.
The BOJ surprised markets in October when it eased policy further by expanding its already massive asset-purchase program, citing downward pressure on inflation expectations from plunging oil prices.
Faced with similar conditions, however, the central bank kept its main policy unchanged last week, while once again extending supplementary loan-facilitating programs beyond their original expiry in March.
Why the difference in approach?
The bank said conditions are improving, and that cheaper oil, although curbing inflation in the near term, will likely support economic activities in energy-importing Japan, lifting prices over time.
At the latest policy meeting, the bank upgraded its forecast of economic growth even while cutting the inflation outlook.
The BOJ has also expressed hope that more companies will implement robust wage hikes in upcoming annual negotiations between employers and labor unions, which will help boost consumer demand and raise prices.
“When forecasting price moves, it is a great factor that there may be wage increases,” a senior BOJ official said, indicating that the bank will hold off on any additional easing until it sees how the wage negotiations unfold before ending in March.
Prime Minister Shinzo Abe has repeatedly called on business leaders to raise salaries — and support his “Abenomics” fiscal policy to exit nearly two decades of deflation in the economy, which fell into recession last year following a consumption tax hike in April.
In response, the Japan Business Federation, a powerful business lobby of large companies which is better known as Keidanren, has said it will allow its member firms to raise pay scales for the second straight year. But at the same time, it rejected a 2 percent pay-scale rise across industries as demanded by the largest labor union, Rengo.
Last year, more companies than before followed the government’s efforts to revitalize the economy, lifting pay scales to an extent not seen over previous years.
Robust earnings in broader sectors have raised hope for continued wage increases this year. But many firms still favor increasing bonuses or other lump-sum payments, rather than hiking pay scales, which pushes up fixed business costs.
Uncertainty remains also over whether smaller businesses can follow the trend of paying larger salaries amid concern over higher raw material and other import costs as a result of the sharp depreciation of the yen — a by-product of the BOJ’s aggressive monetary easing.
Analysts say that even as the impact from oil prices is uncontrollable, the latest downgrading of inflation forecasts — including to 1 percent from 1.7 percent for fiscal 2015 — is a blow to the BOJ’s commitment toward the 2 percent goal.
And they also warn that the bank’s disunity in describing what conditions will warrant the BOJ talking more action to support the economy could undermine its logic and disturb its communications with market participants.
“It is highly possible that this look of being incoherent works to erode investor trust in the BOJ,” Naohiko Baba, chief economist at Goldman Sachs in Japan, said in a report.
The bank could be forced into additional easing to underpin growth in July or October, when its attempt to “buy time will near the limit,” he said.