February 21, 2014 / 10:30 AM / in 5 years

Bank of Japan likely to expand asset buying by summer

TOKYO (Reuters) - The Bank of Japan is expected to ease policy further by this summer to help boost the economy and pull it out of a 15-year deflation, as the effects from Prime Minister Shinzo Abe’s stimulus strategy loses momentum, a Reuters poll showed.

Bank of Japan Governor Haruhiko Kuroda scratches his head as he listens to questions from a reporter during a news conference at the BOJ headquarters in Tokyo February 18, 2014. REUTERS/Yuya Shino

Economists in the survey also remain skeptical that the central bank will achieve its 2 percent inflation target in the year from April 2015.

Just as the world’s third-largest economy is about to hit headwinds from an April sales tax hike, growth is already coming in well below expectations on sluggish exports and lackluster consumer spending and capital expenditure.

Japan’s economy grew at a much slower pace than expected in the fourth quarter, expanding at an annual 1.0 percent rate, well below the median forecast of 2.8 percent.

Given the prospect that the positive effects could be fading from Abe’s unprecedented monetary stimulus and huge fiscal spending, expectations are rising that the BOJ will have to increase its enormous purchases of bonds and other assets.

“Economic data which reflects the sales tax effects will come out around July-September,” said Takumi Tsunoda, senior economist at Shinkin Central Bank.

“They will likely underscore that the pace of rise in prices and growth rate won’t accelerate. The sales tax will rise even as wages barely increase. So this will impact purchasing power.”

Eleven of the 14 analysts surveyed said the BOJ would increase its asset purchasing program by the summer. Four said the central bank would expand the amount in July; two said April, July-September and in October, respectively.

UBS Securities expects the central bank to increase its buying of long-term Japanese government bonds (JGBs) by 10-20 trillion yen per year and double its purchases of exchange-traded funds (ETFs) and real-estate trust funds (REITs).

Mitsubishi UFJ Morgan Stanley Securities forecasts the bank will expand its JGB buying by 10 trillion yen and increase ETFs by 1 trillion yen.

The BOJ says it will buy JGBs so that their amount outstanding will rise at an annual pace of 50 trillion yen ($488.7 billion). And it will buy 1 trillion yen of ETFs a year and 30 billion yen of REITs.

The economists forecast on average that Japan’s core consumer prices will rise 0.9 percent in the fiscal year from April, stripping out the effect of the sales tax hike, and 1.1 percent in fiscal 2015/2016. These are largely in line with the previous survey in January.

The BOJ this week reiterated its upbeat view on the economy but central bank governor Haruhiko Kuroda also said it would not hesitate to act if risks to the BOJ’s forecasts materialize.

The government, in a monthly report this week, said consumer prices were “rising moderately,” the strongest language in more than five years.

The economy will likely expand 0.9 percent in the coming fiscal year after growing 2.2 percent this fiscal year, according to the Reuters’ poll of 26 economists. These compared with forecasts of 0.7 percent and 2.5 percent in last month’s poll. The economy is expected to grow 1.3 percent for fiscal 2015/2016, unchanged from the January poll.

“Worrying factors for the economy will be how consumer spending will recover after the tax hike and the prospect of overseas economies,” said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“It may be difficult to expect much boost from public investment any more as the fiscal 2012 extra budget was so big, and it is hard to imagine an even bigger effect.”

Major trade partner and ally, the United States, has expressed concerns about whether domestic demand will remain a principal driver of Japan’s economy.

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