Bank of Japan reruns inflation downgrade script

October 30, 2015

BAfter over a decade-and-a-half of aggressive monetary easing through asset purchases, the Bank of Japan still has to revise down its inflation projections just about every six months, almost like clockwork.

On Friday, BOJ Governor Haruhiko Kuroda, while keeping the central bank’s massive stimulus programme at a steady pace, said inflation is now expected to hit the BOJ’s 2 percent target sometime late next year or in early 2017, not mid-2016.

Two policy setters even quibbled with how the downgrade was worded, saying it should be made clear that the inflation target would not be met at any time within the central bank’s forecast horizon out to fiscal 2017.

The BOJ also cut its already mediocre growth projections for the current fiscal year by 0.5 percentage points to 1.2 percent.

Barclays economists Kyohei Morita and Yuichiro Nagai wrote:

Such extensions (or softening) of the timeline are beginning to look routine.

We now find it much more difficult to set a calendar-based forecast for monetary policy, and will shift our attention proportionally to event risks.

The latest BOJ targets also appear too optimistic, even to private economists in Japan who are usually willing as a group to go close to the official line.

Those polled by Reuters earlier this month say inflation will clock just 1.1 percent by the end of 2016, half the BOJ’s goal. Economic growth, they say, will be a meagre 0.9 percent this fiscal year.

The BOJ launched its latest quantitative easing programme in April 2013, buying financial assets worth 60 to 70 trillion yen ($581 billion) a year, even buying Nikkei exchange-traded-funds.

In October last year, it announced it would spend 80 trillion yen a year buying bonds.

That is a massive amount of money and the total spend so far in all its easing programmes put together are equal to about 70 percent of Japan’s GDP, according to economists at Nordea.

By comparison, the U.S. Fed’s balance sheet is a quarter of its economy and the Bank of England about a fifth.

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While the substantial stimulus, expected to double the money supply, initially made stocks surge, inflation has yet to pick up for a sustained period over two-and-a-half years later.

Tokyo’s Nikkei stock market index is up 16 percent on a year ago, outpacing even Germany’s DAX. But there is no inflation.

Even a sales tax hike last year failed to boost inflation and ultimately ended up hitting consumer sentiment. The economy contracted in the April-June quarter and inflation came right back down again.

JP Infl

Kuroda has repeatedly stressed the central bank’s expansive policies coupled with Abenomics – Prime Minister Shinzo Abe’s economic revival programme – are working. 

But economy watchers are getting more and more sceptical, mainly because this is a global phenomenon that no set of central bankers appears able to control.

Inflation has been slowing in China, with practically no inflation at all in Britain or the euro zone and nothing threatening so far in the United States.

Given that disinflation trend in many of Japan’s trade partners, the chances that it will soon emerge strongly out of decades of deflation are slim.

Even after headline inflation numbers start rising again following a near-60 percent slump in oil prices since mid-2014, it will not be enough too boost inflation up to 2 percent.

Amy Yuan Zhuang, economist at Nordea, wrote in a note:

Our main argument for more easing is that the BoJ has been over-optimistic on inflation so far. Although we agree that inflation is likely to pick up in the coming months, due to disappearing base effects, it will remain below 2 percent in the coming two years.

The market has generally been sceptical on the BoJ’s inflation target as well. The BoJ has repeatedly used consumer inflation expectations as an argument that the inflation target will be met.

Following a dismal survey for August, where there were whiffs of deflation reappearing, the latest consumer confidence data from the Cabinet Office are more optimistic about a pickup in inflation, although it remains to be seen whether the improvement lasts.

The BOJ may eventually have to bite the bullet and expand its asset purchases. But Kuroda is probably waiting for the right moment, considering how little ammunition he has left not to mention the huge swathes of Japan’s government bond market the central bank now owns.

(Deepti Govind contributed to this post)

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