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Tame inflation threatens to undermine BOJ price target

H.S. Borji
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Tame inflation threatens to undermine BOJ price target

Japanese inflation is unlikely to reach the Bank of Japan’s target in the next five months, fueling speculation policymakers may need to introduce new measures to combat Japan’s decades-long battle with deflation.

The Bank of Japan on Friday will release its latest three-year forecast for economic growth and inflation, potentially giving investors clues about the pace and timing of future policy actions. The BOJ launched an unprecedented stimulus package in April 2013 to reverse the forces of deflation. These measures, the BOJ assured, would achieve “2 percent inflation in about two years.”

The stimulus package, dubbed quantitative and qualitative easing or QQE for short, promised to inject $1.4 trillion into the economy in less than two years, a form of shock therapy that would quickly erode two decades of stagnating prices.

With just five months left before the central bank’s self-imposed deadline, inflation is not only far away from its target, but possibly headed in the wrong direction. An October 27 article published by The Wall Street Journal said the BOJ is now coping with the real possibility of consumer inflation falling below 1 percent, largely due to falling oil prices. The article indicated that, in the BOJ’s view, a $10 drop in crude prices would result in a 0.1 percentage point or more drop in CPI.

Japan’s inflation eased in September to its lowest level in six months, adding more pressure on the BOJ to carve out a short-term strategy to promote price growth.

Consumer prices excluding fresh food increased at an annual rate of 3 percent in September, down from August’s 3.1 percent rate, the national statistics bureau reported in Tokyo.

Stripping away the effects of the April tax hike, core inflation was just 1 percent, making it highly unlikely the BOJ would realize its inflation target by the end of the fiscal year.

The BOJ is expected to make no changes to monetary policy Friday. A growing contingency of economists believes the central bank will add to its massive stimulus program before the end of the fiscal year.

BOJ Governor Haruhiko Kuroda has expressed confidence Japan would reach its inflation target in the two-year timeline, despite price volatility over the summer. Friday’s outlook report could shed light on whether falling inflation has shifted the BOJ’s forecasts in the next three years. Kuroda has maintained that rising inflation expectations and a stronger labour market would help drive up core consumer prices.

Adding to the BOJ’s headaches is a divided policy board, which has expressed concerns about the inflation target several times since QQE was launched. Members have engaged in heated debate about prudent measures for guiding monetary policy, including more flexibility with regards to setting the inflation target. A divided BOJ could undermine the central banking authority in the eyes of the public, thereby eroding market confidence even further.

Board member Sayuri Shirai said last week that long-term inflation expectations are closer to 1 percent rather than 2 percent. Shirai was opposed to the central bank’s view that inflation was rising overall.

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