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The Bank of Japan will be forced to cut its growth and inflation forecasts this week, but officials are signalling that extra economic stimulus is unlikely for now.
Japan’s central bank is set to move its inflation forecast for the 2015 fiscal year down several tenths of a percentage point from the current 1 per cent and shave its growth forecast from the current 2.1 per cent, even as its quantitative easing programme buys Y80tn ($673bn) worth of bonds each year.
But despite a disappointing start to the year, with inflation dipping back to zero, governor Haruhiko Kuroda has argued strongly that the BoJ’s existing stimulus programme intended to boost inflation is on track.
“There are a number of indications that the deflationary mindset, that had taken hold in Japan, is subsiding,” Mr Kuroda said in a speech last week. “Recent labour market developments provide evidence that Japan’s almost two decades of deflation are about to come to an end.”
Bullish talk is no guarantee of inaction with Mr Kuroda — he told Japan’s parliament all was well just three days before a massive expansion of stimulus last October — but his recent arguments would make it hard to justify a move.
Mr Kuroda explained last October’s action by saying weak consumption growth risked dragging down public expectations of inflation. Those expectations are crucial to the BoJ stimulus, because they decide the real interest rate investors expect to earn after adjusting for inflation.
More recently, Mr Kuroda argued, they have been holding up. “A variety of indicators of inflation expectations have been rising in tandem with the rise in the consumer price index,” he said last week.
Daiju Aoki, a senior economist at UBS in Tokyo, said: “I think the BoJ will maintain the current monetary policy,” noting that the central bank’s outlook is for improvement in the economy.
Markets had begun to speculate about a BoJ move this month after comments from Kozo Yamamoto, an MP in the ruling Liberal Democratic party, who was a political godfather of the current Abenomics stimulus.
Mr Yamamoto recently called for an increase in the pace of BoJ asset purchases. But while he is close to some of the “reflationist” economists on the BoJ board, he has no direct influence over the central bank.
According to a Bloomberg survey, just three out of thirty-four economists forecast a BoJ move next week, but more than half expect further easing before the end of the year as oil prices continue to drag inflation down.
“I’m particularly focused on the July meeting,” said Mr Aoki, noting that inflation should trough around then, given the effect of falling oil prices. The BoJ will update its forecasts again in July and the results of this year’s wage negotiations also should be clear by then he signalled.
Other economists think a move is more likely in October. By that stage the BoJ may be forced to cut its inflation forecast for the 2016 fiscal year to below 2 per cent. That would very probably require a policy reaction by Mr Kuroda to maintain the credibility of the BoJ’s policy.
If there is additional stimulus at some point, the options attracting most debate within the BoJ centre on expansion of their existing programme, rather than radical new departures.
BoJ officials think there is still scope to buy assets faster than the current monthly total. They could also extend the maturity of their purchases to longer-dated bonds, in a manner similar to the US Federal Reserve’s Operation Twist in 2011.
Another option would be to change the make-up of purchases, buying more equities or perhaps extending purchases to local government debt.