BoJ warns of stalling inflation

The Bank of Japan has sounded a note of caution in its battle against deflation, warning that price rises may stall after the rapid gains of the past year.

The assessment comes just five weeks after the BoJ concluded in a statement released after its previous meeting that CPI was “likely to rise for the time being”.

Since governor Haruhiko Kuroda unleashed a radical new monetary easing programme last April core consumer price inflation has surged from minus 0.5 per cent to a five-year high of 1.2 per cent, thanks mainly to energy costs pushed up by a big fall in the yen.

The positive mood has been sustained by Prime Minister Shinzo Abe promising to pursue structural reforms while keeping fiscal policy sufficiently flexible to achieve and maintain inflation at 2 per cent.

The BoJ kept its policy framework intact on Wednesday, pledging to keep buying enough government bonds to boost base money at an annual pace of about Y60tn-70tn ($574bn-$670bn).

But in an apparent admission that further CPI gains may be harder to come by, the BoJ said that the year-on-year rate of increase “is likely to be around 1.25 per cent for some time”.

The Japanese language version read similarly, stating that CPI would remain “in the lower 1 per cent range” for some time.

“The BoJ seems to believe the inflation gauge will start stabilising following a rapid acceleration,” said Naoki Iizuka, economist at Citi in Japan. “This might mean that a further rise . . . would likely require additional easing measures at some point in the future.”

In his afternoon press conference Mr Kuroda struck a more assuring tone, saying the BoJ was “moving smoothly” towards its price target, and would make policy adjustments as needed, should “downside risks” appear.

The shift in language comes amid fears that momentum in the Japanese economy may soon be thrown off course by a consumption tax increase in April, the first in Japan for 17 years. The tax hike, from 5 per cent to 8 per cent, is designed to bring government finances one step closer to health but many worry that it could weigh on consumption, throwing the BoJ off course in its pursuit of that 2 per cent target.

At a press conference on Tuesday, Economy Minister Akira Amari said that there is “still a risk that Japan slips back into deflation”. Core consumer prices fell almost without interruption for 15 years after June 1998.

The BoJ is concerned, too, about “lacklustre” performance in some overseas economies, which drags on demand back home. Net exports knocked down Japan’s 3.6 per cent annualised growth by 0.5 percentage point in the third quarter of 2013, and many economists expect another negative contribution in the fourth.

The nine BoJ board members kept their inflation forecasts unchanged from October, at a median of 1.3 per cent – excluding the effects of the tax hike – in the fiscal year beginning in April. But the median real GDP growth forecast was taken down a notch, from 1.5 per cent to 1.4 per cent.

Under Mr Kuroda the BoJ has aimed for consistency, arguing that the only way to overturn entrenched expectations of deflation is to make clear its commitment to ending it.

The bank has now kept policy unchanged for 11 meetings in a row, with only technical tweaks to the timing and method of its asset purchases. Between 2010 and 2012, when former governor Masaaki Shirakawa took incremental measures to deal with the aftermath of the Lehman crisis followed by the country’s biggest earthquake, the longest stretch of “policy unchanged” announcements was four.