The Bank of Japan will cut its growth and inflation outlook for this fiscal year at a rate review next week, but only slightly tweak its projections for next year, sources said, possibly tempering expectations that the central bank will soon ease monetary policy further.
By not straying far from its current projections for next year, the BOJ can maintain that it is still broadly on course to meet its inflation goal of 2 percent next year without needing to step up its massive asset purchase program, people with direct knowledge of the matter said.
Critics say the program has been only marginally effective and distorts the bond market, and the BOJ board itself has not been unreservedly behind it.
Finance Minister Taro Aso also expressed doubt Friday that further monetary stimulus will help achieve the inflation target.
As Japan flirts with yet another recession, hit by weak exports, the BOJ is preparing to cut its core consumer inflation forecast for the fiscal year that began in April to below 0.5 percent in a semiannual report due out on Oct. 30, the sources said. The BOJ forecasted inflation of 0.7 percent three months ago.
But the BOJ, which is trying to bring an end to decades of deflationary pressure with its unorthodox quantitative and qualitative monetary easing program, will only cut by 0.1-0.2 point its forecast that price rises will accelerate to 1.9 percent next fiscal year, keeping it near its target, they said.
“Overseas headwinds are largely behind the current economic slowdown,” one source said. “That means the downward pressure on inflation will be milder than last year,” he said, when firms were reluctant to raise prices as household spending was restrained by a sales tax hike.
The sources said the forecasts had not been finalized and changes could be made ahead of the announcement. The projections are compiled by the nine members of the BOJ Policy Board.
Under Gov. Haruhiko Kuroda, the BOJ is gobbling up the bulk of the government’s bond issuance and other assets to boost base money by ¥80 trillion a year. He led the bank to expand stimulus last October.
But oil price declines have brought inflation to a halt, and weak global demand is heightening chances of another recession, keeping alive market expectations that the BOJ will ease again next week.
Economists in a Reuters poll forecast inflation of just 1 percent next fiscal year, with six of the 13 predicting the BOJ will add to its stimulus next week.
The BOJ meeting comes after European Central Bank chief Mario Draghi on Thursday signaled his readiness to deploy new stimulus measures to fend off the risk of deflation from falling commodity prices and weak emerging market demand.
BOJ officials have taken a more sanguine approach, arguing that resilience in private consumption and capital expenditure would offset some of the pain from weak demand for exports.
Many of them expect Japan to emerge from the doldrums next year as the hit from China’s slowdown ebbs. Inflation will also accelerate next year as the effect of energy price falls dissipate, they say, pointing to a growing number of companies that are raising prices of goods.
The BOJ is preparing to slash this fiscal year’s forecast for economic growth to around 1 percent from the present 1.7 percent. But it will likely not substantially alter its forecast for 1.5 percent growth next fiscal year, the sources said.
The final BOJ forecasts, which represent the median of the board members’ projections, could be worse if some members offer bleaker assessments than expected now.
Kuroda has said he sees no immediate need to ease further, stressing that a tightening job market will lead to wage gains and boost consumption, helping Japan generate modest inflation.
Not all board members share Kuroda’s optimism, with pessimists fretting that the global slowdown may drag on Japan’s growth longer than expected. Some also worry about the strength of consumption.
But many are wary of expanding the already massive stimulus program, preferring to stand pat unless weak global demand hits corporate profits enough to discourage them from raising wages.
The BOJ releases a semiannual report with long-term economic and price forecasts in April and October that serve as a basis of monetary policy decisions.
It reviews these forecasts in January and July.