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BOJ tightening to begin sooner than expected, U.S. economist Allen Sinai says

Bloomberg

Japan’s economy will exceed growth forecasts this year, prompting the central bank to tighten monetary policy by mid-year, said Allen Sinai, president of Decision Economics Inc.

Sinai said he expects Japan’s economy to grow 2 percent in 2018, and even faster in 2019, perhaps as much as 2.5 percent.

“What has snuck up on everybody is the world business cycle is really clicking,” he said in an interview in Tokyo on Wednesday, where he was meeting with policymakers.

Sinai’s forecast came as the World Bank announced a 1.3 percent growth projection for Japan this year, down from an estimated 1.7 percent increase last year.

The market’s reaction on Tuesday to the Bank of Japan’s reduced buying of long-dated bonds illustrates growing jitters over when the central bank will start normalizing its policy. Economists cautioned against reading too much into the BOJ’s bond buying, but with Japan’s economy in its longest expansion since the mid-1990s, expectations are rising that the BOJ will join its global peers and begin normalizing as soon as this year.

“The markets and I are sensing, because of the fundamentals of the Japanese economy, an upside surprise potentially on growth and on inflation, and therefore a surprise out of the BOJ,” Sinai said.

Inflation remains well below the BOJ’s target of 2 percent, but its preferred gauge rose steadily throughout last year, hitting 0.9 percent in November. Sinai said he expects inflation to reach 2 percent before the BOJ’s projected time frame of “around” fiscal 2019 beginning in April of that year.

Sinai said his firm is forecasting that the BOJ will “become less accommodative” in the next three to six months, allowing interest rates to rise while setting an upper limit, he said.

BOJ Gov. Haruhiko Kuroda said last month that the central bank won’t raise rates just because the economy is doing well because its ultimate target is inflation.

Sinai stands on the bullish side of prognosticators. Of 41 economists who expect the BOJ’s next move to be tightening, 19 forecast it to come this year, including five who see it happening in April, according to a Bloomberg survey last month.

A year ago, Sinai was roughly on target when he predicted Japan’s economy would grow 1.5 percent to 1.75 percent in 2017, about double the International Monetary Fund’s forecast at the time. He was wide of the mark on the yen, though, forecasting it would weaken to as much as 135 against the dollar by the end of the year.

Sinai said it would “absolutely” be good if Kuroda remained governor after his term ends in April, given he is a “known quantity” who has proven capable of doing the job. Prime Minister Shinzo Abe would be taking a risk if he chose someone else, Sinai said.

Even with his bullish outlook, Sinai sees challenges ahead for Japanese policymakers. In particular, uprooting the deflationary mindset of consumers will remain a struggle, he said.

“The history of that says that once it’s there it takes a long, long time to change,” he said.