Bank of Japan cuts inflation forecast, holds off on policy change

Yen rebounds while stocks fall as central bank refrains from expanding stimulus programme

PUBLISHED : Wednesday, 21 January, 2015, 8:19pm
UPDATED : Wednesday, 21 January, 2015, 8:19pm

Two years into so-called Abenomics - a mix of aggressive monetary and fiscal policy plus structural reform - the Bank of Japan is struggling to reach an ambitious inflation target and convince Japanese that years of deflation are in the past.

Instead, inflation is slowing, the economy is only slowly emerging from recession and confidence among the economy's bedrock manufacturers is slipping.

The Bank of Japan sharply cut its inflation forecast yesterday and its governor conceded it might take longer than expected to hit 2 per cent inflation, underlining the challenges of meeting the target as oil prices continue to slump.

The yen rebounded against the US dollar and Japanese equities fell after the central bank held off on expanding its stimulus drive, despite nearly halving its core consumer inflation forecast for the year beginning in April to 1 per cent.

Bank of Japan governor Haruhiko Kuroda defended the decision, saying that while the lower cost of fuel might weigh on inflation in the short term, it would stimulate the economy and thus accelerate price growth.

"Looking at wage negotiations and inflation expectations, fortunately there is no concern of Japan being beset by a deflationary mindset again," Kuroda said. "If Japan is making steady progress towards achieving 2 per cent inflation, there's no need to take additional steps."

As widely expected, the Bank of Japan kept its pledge to increase base money at an annual pace of 80 trillion yen (HK$5.26 trillion) by buying government bonds and other securities. The central bank instead extended by a year the deadline of several loan schemes aimed at encouraging banks to boost lending, and expanded the size of one of them.

Japan's economy slipped into recession in the third quarter of last year and is only barely emerging from the doldrums as the impact of a sales tax increase in April begins to ease.

Prime Minister Shinzo Abe was given a fresh mandate to put an end to 15 years of deflation with his stimulus policies after his ruling party's landslide victory in snap elections last month.

In a review of its long-term estimates, the Bank of Japan cut the next financial year's core consumer inflation forecast to 1 per cent, from the 1.7 per cent projected three months ago.

But it roughly maintained its forecast that inflation will exceed 2 per cent in the 2016 financial year and revised up its economic growth forecast, pointing to a rebound in exports and an expected boost from government stimulus measures.

Kuroda said Japan might not see inflation hit 2 per cent, depending on oil price moves.