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In major setback for Abenomics, BOJ gives up hitting inflation target during Kuroda’s term

Kyodo, Bloomberg

The Bank of Japan acknowledged defeat Tuesday in its quest to achieve its 2 percent inflation goal during Gov. Haruhiko Kuroda’s term through April 2018, dealing a major setback to Prime Minister Shinzo Abe and his Abenomics policy mix that was designed to tame prolonged deflation.

The central bank, however, left its monetary policy unchanged, with Kuroda saying that the nation’s economic situation remains little changed from late September, when the BOJ’s last Policy Board meeting was held.

The central bank has already pushed back the time frame for attaining its inflation target four times since Kuroda took office in 2013. His term ends in April 2018 and the BOJ now hopes to meet its target sometime in the fiscal year that starts that month.

“It is regrettable that we were not able to realize 2 percent inflation within two years,” Kuroda said at a news conference after a two-day policy board meeting that began Monday.

Warning against downside risks to prices, Kuroda said, “The BOJ will make policy adjustments as appropriate to maintain the momentum toward achieving the price stability target.”

Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said before the BOJ statement: “What’s more important for them now is that they are moving toward the goal,” rather than the particular timing of hitting the inflation target. “They are putting more emphasis on communication rather than surprising markets.”

Kuroda and other board members, including Deputy Gov. Kikuo Iwata, had signaled in recent weeks that getting to 2 percent inflation will take more time. Iwata told lawmakers last week that it was hard to say the target would be reached during his term. Kuroda said in an interview last month that the bank would need to keep or strengthen its easing for “months and years” to come.

“We now think that the BOJ will ease policy only in the second half of 2017 because it will take time before it acknowledges that inflation is not following its outlook,” JPMorgan Chase & Co. economist Hiroshi Ugai, who previously worked at the central bank, wrote in a note Friday.

For now, the BOJ will be content to continue with its so-called quantitative and qualitative easing with a yield curve control program, along with the pledge adopted at the last meeting to overshoot its own inflation target, Ugai wrote.

In its quarterly outlook report released Tuesday, the BOJ also downgraded its inflation outlook for fiscal 2016 through fiscal 2018.

The bank said it expects core consumer prices to rise 1.5 percent in fiscal 2017, revised downward from 1.7 percent projected in late July, while projecting they will climb 1.7 percent in fiscal 2018, down from the earlier estimated 1.9 percent.

“On the price front, the momentum toward achieving the price stability target of 2 percent seems to be maintained, but is somewhat weaker than the previous outlook, and thus developments in prices warrant careful attention going forward,” the BOJ said in its report.

The central bank is far from achieving the inflation goal as Japan’s core consumer price index, excluding volatile fresh food prices, fell for the seventh straight month in September, down 0.5 percent from a year earlier.

At the last meeting, the BOJ decided to shift its policy target to the yield curve instead of quantitative easing, aiming to prepare for a long-term battle to realize 2 percent inflation.

Since then, the BOJ has modified the framework of its bond-buying program to keep the yield of the bellwether 10-year Japanese government debt at around zero percent, while leaving intact the negative interest rate of minus 0.1 percent for some reserve funds held by private banks at the BOJ.

Central bankers, including Kuroda, have expressed eagerness to assess the impact of the new set of policies, as a few factors ahead could provide a ray of hope to the BOJ.

The BOJ has argued that lower global crude oil prices, tepid domestic demand in the wake of a consumption tax hike in 2014, and financial market instability have thwarted its efforts to achieve the inflation goal for over three years.

Recently, oil prices have turned upward, especially after OPEC agreed in late September to cut oil output. Domestic demand in Japan has shown signs of picking up as labor market improvement has raised hopes for wage growth.

A possible near-term rate hike by the U.S. Federal Reserve could also weaken the yen against the dollar, helping push up consumer prices in Japan with import prices increasing. Japan depends on imports for over 90 percent of its energy needs.

With the supply and demand balance improving and inflation expectations rising, the year-on-year rate of change in the core CPI is “expected to increase toward 2 percent,” the BOJ said.

“The bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target,” it added.

Many economists expect the nation’s core CPI to start rising later in the current fiscal year, although the pace is likely to be moderate.