The governor of the Bank of Japan on Wednesday dismissed the need for additional monetary easing as prices are headed toward its inflation target and as overseas economies recover, damping expectations for more stimulus to offset the impact of a sales tax rise in April.
The central bank kept monetary policy steady at a review earlier in the day and maintained its upbeat inflation forecasts, highlighting expectations that a recovery in economic growth will continue to broaden.
The weak yen, which inflates import costs, has helped Japan pass the halfway mark toward the BoJ’s 2-per-cent inflation target with prices in November up 1.2 per cent from a year before.
While markets are deeply skeptical whether inflation will accelerate further, recent price gains and signs of economic strength have made central bankers more certain that Japan is on track to meet their price target.
“Of course, there could be both upside and downside risks to the BoJ’s price forecast but such risks have not materialized, and if that’s the case, the current policy will continue,” Governor Haruhiko Kuroda told a news conference.
The BoJ announced a huge stimulus program in early 2013 and prefers not to ease again unless the sales tax hike this April causes far more damage than expected.
As widely expected, the BoJ maintained its commitment of increasing base money at an annual pace of ¥60– ¥70 trillion yen ($577– $673-billion) via aggressive asset purchases.
In a quarterly review of its long-term forecasts, the BoJ maintained its forecast that core consumer inflation will hit 1.3 per cent in the fiscal year beginning in April and accelerate to 1.9 per cent the following year.
“Japan’s economy is continuing to recover moderately with consumers recently front-loading spending ahead of the sales tax hike,” the central bank said, adding it expects consumer inflation to move around 1.0-to-1.5 per cent for the time being.
Board member Sayuri Shirai made a rare dissent to part of the BoJ’s economic assessment, saying that the slow pace of improvement in job and income conditions must be added as among the risks to the outlook.
“As long as the BoJ’s economic projections are unchanged, the bank will likely stand pat on policy for the time being, even though some market players are expecting the BoJ to ease further in coming months,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute.
The economy is likely to boom until March as consumers rush to beat the sales tax hike, and many analysts agree with the BoJ’s view that the pain from the higher tax will be temporary.
Some, however, fret the tax hike may hit consumption harder than expected, while others doubt inflation will accelerate much more, as prices will soon lose support from the weak yen.
Such skeptics have thus speculated the BoJ may act soon to pre-empt the damage from the tax hike.
Kuroda’s response was to emphasize that the impact from the sales tax hike will be short-lived and that a narrowing output gap will continue to push prices toward the BoJ’s goal.
“There will be some volatility because growth will rise and fall sharply around the time of tax hike, but the positive cycle building in the economy will remain intact,” Kuroda said.
The BoJ launched an intense burst of monetary stimulus last April, pledging to accelerate inflation to 2 per cent in roughly two years via aggressive asset purchases in a country mired in deflation for 15 years.
There are some initial signs of success.
A leading indicator of capital expenditure hit a five-year high in November, while Japan’s most influential business lobby has agreed to raise workers’ base pay for the first time in six years as the economy gains momentum.
Still, a recent Reuters poll showed economists do not expect firms to raise wages significantly this year and project inflation will stay well below the BoJ’s target, underscoring the challenges that lie ahead for the central bank.
There are some concerns, both in Japan and overseas, that the BoJ may be relying too much on a weak yen to meet its inflation target, because a falling currency pushes up import prices.
Kuroda, during the press conference, repeated the BoJ’s view that its monetary policy is aimed at achieving price stability and not focused on currency levels.