BOJ postpones 2% inflation target in wake of low oil prices

Bloomberg, Kyodo

The Bank of Japan on Friday postponed its forecast for reaching its 2 percent inflation target, saying that the timing of hitting that goal depended on oil prices.

The central bank kept its monetary policy unchanged the same day.

The bank’s board now expected prices to rise 0.1 percent this fiscal year, down from 0.7 percent, and 1.4 percent next year.

The bank had previously said it saw inflation rising to meet the target around the six months through September 2016. This has now been pushed back to the six months through March 2017.

At a news conference later in the day, BOJ Gov. Haruhiko Kuroda maintained that the bank will not hesitate to adjust policy if there are threats to the price trend. Regarding the decision to push back the inflation target date, Kuroda blamed drops in oil prices and emphasized that the price trend was steadily improving.

He also underlined the need for wage hikes, saying inflation and pay raises must go in tandem.

Regarding its monetary policy, the BOJ Policy Board earlier Friday voted 8-1 to continue expanding the monetary base at an annual pace of ¥80 trillion.

Economists were split on the likelihood of an increase in the BOJ’s already record asset purchases, while government officials and Finance Minister Taro Aso had talked down the need for more stimulus.

“I don’t think this is the end — expectations for easing will be carried over to coming months,” said Daiju Aoki, an economist at UBS Securities Japan Co., who forecast the BOJ would add stimulus today.

“The BOJ risked putting itself behind the curve by not acting today. Kuroda had been pre-emptive to address emerging risks but now they are becoming reactive.”

Data earlier Friday showed the BOJ’s key price gauge, which strips out food costs, dropped for a second straight month. After removing both food and energy, prices climbed 0.9 percent in September.

JPMorgan Chase & Co. and Mitsubishi UFJ Morgan Stanley Securities Co. are among those that expected the BOJ to cut its inflation forecasts on Friday. Economists also had speculated that the central bank may need to push back its date for reaching 2 percent inflation.

Recent economic data are mixed. Retail sales unexpectedly dropped in September, exports rose and a report Thursday showed industrial production increased 1 percent, more than economists projected.

The BOJ’s decision comes after the U.S. Federal Reserve indicated Thursday that December was still a possibility for its first rate increase since 2006 as it softened its language on global economic risks.

It is not the first time the BOJ has left policy unchanged while trimming its price forecasts and pushing out the timing of reaching the 2 percent goal.

It did much the same thing in April, when Kuroda mainly attributed the delay to lower oil prices.

BOJ board member Takahide Kiuchi dissented on the decision again, proposing that the bank cut the bond purchase target to ¥45 trillion a year from the current ¥80 trillion. That proposal was defeated by the other eight board members.

Sixteen of 36 analysts surveyed by Bloomberg said they expected the BOJ to expand stimulus on Friday, eight forecast further easing at a later date and 12 saw no prospect of any change in the foreseeable future.

In the most recent projection in July, the BOJ assumed Dubai crude oil prices would rise from $60 to $70 per barrel toward its projection period ending in March 2018. It hasn’t traded above $60 since then.

“Pressure will only mount for more easing,” Masamichi Adachi, an economist at JPMorgan Chase & Co. and a former BOJ official, said before Friday’s decision. “The economy is clearly not strong enough to suggest 2 percent inflation is under way.”

The BOJ board next meets Nov. 18 and 19.