The Bank of Japan’s preferred inflation gauge fell for the second straight month in April, dropping from 0.9 percent in the previous month to 0.7 percent, as consumer prices refuse to cooperate with the BOJ’s 2 percent inflation target, according to government data released Friday.
But the preferred price index — which excludes fresh food prices — was not the only measure to fall, as overall consumer prices also fell sharply, from 1.1 percent to 0.6 percent.
While market participants expect the drop to be temporary, with prices recovering in 2018, the persistent inability for inflation to gain upward momentum could further swing the monetary policy pendulum away from normalization. That idea was floated by Gov. Haruhiko Kuroda earlier this year, but was walked back over the course of the past few months.
The flip-flop regarding a possible exit has been a familiar dynamic over the past five years at the BOJ. For every step forward there have been two steps back, as policymakers are often initially sanguine in reading economic data yet subsequently forced to revisit overly optimistic policy projections time and time again.
Since instituting unprecedented stimulus measures, Kuroda and the board have pushed back the timeline for the ever elusive inflation goal on six occasions, the result of both external factors such flagging inflation and internal uncertainty in an unclear policy message.
“The Bank of Japan under Kuroda has always lacked consistency,” said Sayuri Kawamura, Senior Economist at The Japan Research Institute. “One of the reasons for this is because the bank lacks complete independence from government interference. Kuroda goes back and forth in order to try to save face.”
Kuroda’s exit comments before the Lower House in March 2018 initially rattled markets, leading some market participants to believe that the BOJ may finally be taking its foot off the gas after almost a half a decade of unprecedented monetary stimulus.
But due to inconsistencies at the central bank, and leaving aside increased market expectation of an exit, it is difficult to read the tea leaves as to whether the BOJ was ever sincere about an exit.
“As the BOJ maintains its 2 percent inflation target, it does not make sense … to implement an exit from its monetary easing. In this sense, the chance of an ‘exit’ has always been no more than wishful speculation by the financial market,” said Takuji Okubo, chief economist at Japan Macro Advisors.
Policy indecisiveness aside, Friday’s data demonstrated the recent malaise in prices, as the BOJ’s preferred inflation gauge continued to fall. The most narrow definition of inflation, which strips out energy and food prices — known as core-core — also dropped to 0.4 percent from 0.5 percent.
Daiju Aoki, chief Japan economist at UBS Securities Japan, said the recent data will make the bank take a more careful position about normalizing or raising interest rates.
“The Bank of Japan is taking a wait-and-see approach, because recent data has made Kuroda aware of the downside risks to inflation,” said Aoki.
The BOJ’s recent actions indicate a more cautious approach compared with Kuroda’s March comments. At the first policy meeting in late April, the monetary policy committee removed a reference to a 2019 timeline for reaching 2 percent inflation.
Still, as inflation remains subdued, an increasingly indecisive BOJ appears even more reluctant to institute additional easing after exhausting almost all policy tools to ease monetary conditions.
“While the BOJ has for the moment moved away from the exit, as there are side-effects to this monetary policy the BOJ will not move toward more stimulus,” said Takehiro Noguchi, senior economist at Mizuho Research Institute.
“If they can’t hit the 2 percent inflation target under the current policy, and there is a downturn in the economy, it will be the worst-case scenario for the BOJ.”