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The Bank of Japan is set to keep monetary policy steady at its first rate review this year, becoming more confident about meeting its price goal on signs a broadening economic recovery may nudge firms into spending more on wages and investment. |
The weak yen, which inflates import costs, has helped Japan pass the halfway mark toward its 2% inflation target with prices rising 1.2% in November from a year before.
While market suspicion runs deep on whether inflation will accelerate further, the recent price gains and signs of economic strength are making central bankers more convinced that Japan is on track to meet their price target.
The BoJ, which announced huge stimulus in April 2013, is thus in no mood to ease again any time soon. Many in the central bank prefer not to act unless clear evidence emerges that the sales tax hike which will take effect in April causes far more damage than expected.
“Political pressure for further easing may heighten from April, when people actually start to feel the pain from the tax hike,” said Yasuhide Yajima, senior economist at NLI Research Institute in Tokyo. At the two-day policy meeting that ends on Wednesday, the BoJ is set to maintain its commitment to increase base money at an annual pace of ¥60-70tn ($576bn-$672bn) via aggressive asset purchases.
The market will focus on the BoJ’s quarterly review of its long-term forecasts, part of next week’s meeting.
The central bank may slightly revise up its core consumer inflation projection of 0.7% for the fiscal year ending in March, taking into account the boost on import prices from a weak yen, say sources familiar with the bank’s thinking.
Any other changes to the projections will be minor and won’t alter the BoJ’s view that Japan will see inflation accelerate to 2% sometime next year, they say.
The central bank currently expects core consumer inflation to accelerate to 1.3% in the next fiscal year, which begins April 1, and to 1.9% the following year. When the BoJ launched an intense burst of monetary stimulus last April, it pledged to accelerate inflation to 2% in roughly two years via aggressive asset purchases in a country mired in deflation for 15 years.
The BoJ’s shock move lifted business sentiment and household spending by weakening the yen and bolstering share prices, giving the world’s third-largest economy a much-needed boost.
The economy is likely to boom until March as consumers rush to beat the sales tax hike, and many analysts side with the BoJ’s view that the pain from the higher tax will be temporary.
But some fret that the tax hike may hit consumption harder than expected as companies won’t raise wages enough to keep disposable incomes from declining because of the higher tax.
Others also doubt consumer inflation will accelerate much from here, as prices will soon lose support from the weak yen. BoJ Governor Haruhiko Kuroda has dispelled speculation the central bank will act soon to pre-empt the damage from the tax hike. But looming challenges to meeting the 2% price target will keep alive market expectations of additional stimulus sometime this year, analysts say.
A recent Reuters poll showed economists do not expect companies to raise wages significantly this year, and project inflation to stay well below the BoJ’s target.