Shoppers at a supermarket in Tokyo. The Bank of Japan may trim its inflation forecasts on Friday.

Reuters/Tokyo

 

The Bank of Japan may trim its inflation forecasts on Friday and admit that slumping oil prices will delay a pick-up in price growth by several months, but maintain its view that inflation will hit its 2% target next year, sources said.

The nine-member board may also debate whether to issue clearer guidance on its asset-purchasing plan for 2015, though a decision may be put off until later this year, the sources familiar with the central bank’s deliberations said.

A slew of recent weak data has cast doubt on the BoJ’s rosy forecasts, keeping it under pressure to expand stimulus. Exports remain sluggish despite the boost from a weak yen and output has slumped as a sales tax hike in April hurt consumption.

The BoJ is thus likely to roughly halve its 1 percent economic growth forecast for this fiscal year ending in March in a twice-yearly outlook report to be issued at Friday’s rate review, sources have told Reuters.

It may slightly cut its inflation forecasts for the current fiscal year ending in March, and possibly the following year, reflecting sharp oil price falls, say other officials familiar with its thinking.

But any downgrade will be minor and won’t alter the BoJ’s scenario that inflation will reach its 2% target in the next fiscal year beginning in April 2015, the officials said.  “Core consumer inflation is moderating somewhat due largely to declines in energy prices,” BoJ Governor Haruhiko Kuroda told parliament yesterday, acknowledging that the recent dramatic fall in oil prices is weighing on Japanese prices.

“But after hovering around 1%-1.50 % for some time, consumer inflation will accelerate in the latter half of the current fiscal year,” he said.

At Friday’s meeting, the BoJ is expected to keep its monetary settings unchanged and maintain its massive asset-buying programme launched in April last year. The plan aims to accelerate inflation to 2% in roughly two years to pull the long-moribund economy out of two decades of deflation.

It is not expected to offer any hints of a near-term expansion of its “quantitative and qualitative easing” (QQE), despite widespread expectations in financial markets that it will have to offer more support to stimulate activity.

The BoJ now forecasts consumer inflation of 1.3% in the current fiscal year and 1.9% in the following year, excluding the effect of the April sales tax hike.

Any cut in next fiscal year’s forecast would be the first since the BoJ announced QQE in early 2013. But it would still leave the bank’s forecast more optimistic than private analysts who, in a Reuters poll, expect inflation of only 1.3%.

The BoJ has stuck to its inflation forecasts even as gloomy signs in the economy forced it to cut its GDP estimates.

The central bank is expected to justify its rosy price forecast by arguing that companies, which saw profits rise thanks to Prime Minister Shinzo Abe’s stimulus policies, will boost capital spending and wages to lure employees in a tightening job market.

That will accelerate inflation as stronger consumption will allow firms to pass on rising costs, BoJ officials say.

Indeed, the jobless rate has hit 3.5%, a level the BoJ considers as near full employment, and the availability of jobs is at its highest in 22 years. Big firms are raising salaries and bonuses, and a key BoJ survey showed they are keen to increase capital spending.

As long as a positive economic cycle remains in place, in which companies and households continue to earn more and keep spending, prices will gradually accelerate, the BoJ says.

But growing risks to growth makes it tough for Kuroda to sell his optimistic scenario. A sharp fall in global oil prices, which shed 25% since June, is seen nudging consumer inflation below 1% in coming months and prices may not accelerate much until well into next year, some BoJ officials say.

That would contradict Kuroda’s reassurances that inflation won’t fall below 1% due to improvements in the economy.

Data on Friday is likely to show annual core consumer inflation slowed to 1% in September from 1.1% in August, according to a Reuters poll.