BOJ in credibility test as divisions emerge over inflation target

Fri Apr 26, 2013 7:10am EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Leika Kihara and Stanley White

TOKYO (Reuters) - Bank of Japan policymakers are divided over whether the central bank can meet its inflation target in two years, underlining concerns it has set an unrealistic goal in its battle to end 15 years of deflation despite plans for a massive burst of monetary stimulus.

The central bank held off on offering any fresh policy initiatives following the April 4 policy meeting, when new Governor Haruhiko Kuroda stunned markets by promising to inject about $1.4 trillion into the economy to hit the 2 percent inflation target in roughly two years.

The BOJ's semi-annual economic report, which is based on forecasts from the BOJ board's nine members, showed the degree to which other policymakers share Kuroda's view.

Their median forecast shows they expect core consumer inflation, the central bank's preferred gauge for price trends, to reach 1.9 percent in the year to March 2016, close to the bank's target. But the forecasts of the board members ranged widely, from 0.8 percent to 2.3 percent.

And while the BOJ officially said it expected to achieve 2 percent inflation towards the latter half of its projection period out to March 2016, board members Takahide Kiuchi and Takehiro Sato dissented against that view, underlining the division in the board.

"The BOJ's inflation forecast is quite ambitious and probably pretty hard to achieve," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo.

"There's no guarantee that by expanding base money, the BOJ can heighten inflation expectations," he said. "It would be tough to achieve 2 percent inflation in Japan with monetary easing alone."

A gap in the views of future inflation poses a dilemma for the BOJ because its policy relies so much on shaping market and public expectations, or trying to nudge people into spending more on the belief that prices will finally start to rise in the future.   Continued...

Bank of Japan Governor Haruhiko Kuroda leaves after a news conference in Tokyo April 26, 2013. Kuroda said there was no talk at Friday's policy meeting that additional monetary easing was needed at this stage, following the central bank's massive monetary stimulus earlier in the month. REUTERS/Yuya Shino