Business / Economy

Bank of Japan expected to cut price forecasts as inflation expectations stall

Reuters

The Bank of Japan is likely to cut its price growth forecasts at a policy meeting later this month as long-term inflation expectations stall, sources said, highlighting the central bank’s difficulty in hitting its elusive price target.

Three sources said the BOJ is likely to cut its projection for core consumer price growth this fiscal year to around 1.0 percent from the 1.3 percent projected in April, and for next year to around 1.5 percent from 1.8 percent.

The sources spoke on condition of anonymity because the BOJ Policy Board’s discussions are confidential.

The BOJ said Tuesday that companies in its tankan survey expected consumer prices to have risen 0.9 percent a year from now, slightly above their projection of 0.8 percent three months ago.

Companies in the survey also expected consumer prices to have risen an annual 1.1 percent three years from now and 1.1 percent five years ahead, suggesting little confidence in the BOJ’s 2 percent target being reached anytime soon.

Tuesday’s tankan findings came in the wake of a massive stimulus program deployed by the BOJ in 2013 aimed at shocking consumers out of their “deflationary mindset” and boosting corporate and household inflation expectations.

After failing to make much headway on price growth, the BOJ revamped its policy framework in 2016 to one better suited to a long-term battle against deflation, although its results have been modest.

The bank is increasingly at a loss to explain why consumer prices consistently undershoot. BOJ Gov. Haruhiko Kuroda has suggested that online shopping, which allows consumers to easily find the lowest prices for goods and services, may be one reason.

“The BOJ will try to explain why inflation is not picking up when it next meets, but the reality is wages are not rising much and some people are not confident in the outlook,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

The Policy Board is due to review its quarterly projections at a meeting ending July 31, and will examine whether t weakness in consumer prices is likely to continue.

Japan has what appears to be unusually low unemployment at 2.5 percent and 1.6 jobs for every applicant, but BOJ Deputy Gov. Masazumi Wakatabe has said that what looked like some slack in the labor market could in fact be underemployment among workers in the 20 to 50 age category.

Underemployment refers to skilled workers stuck in lower-paying jobs and part-time workers who want to work full time but cannot find a suitable job and could help explain Japan’s chronic lack of inflationary pressure.

The nationwide core consumer price index, which includes oil products but excludes volatile fresh food costs, rose just 0.7 percent in May from a year earlier, well below half the central bank’s 2 percent target.

Economists say the BOJ is unlikely to ease policy any further because of concerns that its heavy buying of government debt is hurting bond market liquidity and that its negative interest rate policy is squeezing bank margins.

The economy is expected to have bounced back in the second quarter after a contraction in the first quarter, which ended the longest uninterrupted period of growth since the 1980s bubble economy.

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