Bank of Japan Gov. Haruhiko Kuroda’s faith he can push inflation from zero to 2 percent in about a year is starting to win over consumers and bond investors.
A government survey released June 9 showed 2 in 5 consumers expect prices to rise by 2 to 5 percent in 12 months, while a quarter estimate they will jump more than 5 percent. Inflation-protected bonds are signaling living costs will rise 1 percent per year over the next decade, up from 0.75 percent at the beginning of the year.
Benchmark 10-year notes are set to complete their first consecutive quarterly decline since March 2011 as a 40 percent rally in oil from a six-year low bolsters Kuroda’s claim that the BOJ price goal may be reached between April and September next year. The central bank last week maintained its plan to expand the monetary base at an annual pace of ¥80 trillion ($652 billion) after inflation vanished two months ago.
“Kuroda seems to be confident inflation will pick up,” said Kenro Kawano, chief bond strategist at Morgan Stanley MUFG Securities Co. in Tokyo. “If consumer prices exceed year-end forecasts, expectations for more easing will dissipate.”
While Japan’s 10-year bond yield is likely to climb to 0.75 percent by year-end from 0.415 percent Monday, it could jump to as high as around 1 percent as the market’s inflation outlook changes, according to Kawano. The CPI will probably start rising after autumn as the effect of last year’s falling oil wanes, he said.
Kuroda’s yen comments this month underscore his positive view on prices, said Naohiko Baba, Goldman Sachs Group Inc.’s chief Japan economist and a former BOJ official. The real effective rate, which adjusts for inflation and trade with other nations, is already very weak and it’s hard to see it falling further, Kuroda told lawmakers on June 10.
“Kuroda’s comments suggest that the BOJ doesn’t see much scope for the yen’s real effective exchange rate to fall because it expects CPI to increase,” Baba said.
The governor said Friday that CPI will rise toward 2 percent as oil prices rebound and reiterated that the central bank will continue easing until inflation stabilizes at that level.
The timing of Kuroda’s price target faces skepticism. Among 32 economists surveyed by Bloomberg this month, only two predicted that the BOJ will reach its goal within its projected period. Thirteen say the central bank will forgo further stimulus, up from 10 out of a total 36 responses in a May poll.
“There is no credibility in what the BOJ says about prices because it expanded stimulus unexpectedly last year, while keeping its bullish price outlook,” said Toru Suehiro, an economist at Mizuho Securities Co. “With market expectations tilting toward no further easing, bonds will bear the brunt.”
Despite doubts over the target’s timing, there are signs that the BOJ’s stimulus is ending the nation’s deflationary mindset. Base pay rose 0.4 percent in April, a second straight increase, and a BOJ survey this year showed consumers feel inflation is higher than 5 percent.
Takeshi Minami, an economist at Norinchukin Research Institute, expects the recovery to continue.
“The labor market is tightening and the BOJ is expecting that to put upward pressure on wages,” said Minami, who forecasts core CPI will rise 0.4 percent at end of December before advancing 0.7 percent at the end of March. “Hourly wages for part-time workers have risen sharply in recent months and this trend may accelerate further.”
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