TOKYO (Reuters) - Rising prices for budget haircuts and bowls of beef and rice are helping Bank of Japan Governor Haruhiko Kuroda win over doubters in his own ranks of his ambitious drive to cast off deflation.
Sluggish exports and a sales tax increase on April 1 had some board members openly questioning Kuroda, and bureaucrats were quietly game-planning policy options.
Now, as early data and anecdotes suggest the recovery in the world’s third-biggest economy has not been derailed by the tax hike, investors and other BOJ policymakers are coming around.
Central bank officials scouring the streets found higher prices for deflationary staples such as bargain haircuts and “gyudon”, bowls of beef strips with onions over rice that are gobbled up by blue- and white-collar workers across the country.
Barbers were raising prices more than enough to cover the increase in the sales tax to 8 percent from 5 percent, the mandarins found, and restaurants were also able to raise prices.
“If gyudon shops are passing on the higher costs, that tells you something about changes in psychology,” said a BOJ official who compared prices at the various beef-bowl restaurant chains. “It’s another positive sign for the economy.”
Another senior official said evidence is mounting that companies have the pricing power to pass on the burden.
“That’s a relief.”
Kuroda stunned global markets in April 2013 with an unprecedented flood of yen liquidity, but by year’s end markets and economists were looking for more as the blast from the BOJ bazooka and Prime Minister Shinzo Abe’s heavy government spending seemed to ebb.
The bookish former currency bureaucrat has remained upbeat even in private, insiders say, that his “quantitative and qualitative easing” (QQE) would end 15 years of falling prices by generating 2 percent inflation in two years.
“Things are on track, perhaps more than initially expected,” said a person familiar with the central bank’s thinking, adding that there is “more conviction within the BOJ” on meeting its inflation target.
Economists have priced out the chance of additional stimulus at the BOJ’s meeting on Wednesday.
Instead, the BOJ is set to maintain its stimulus at the current pace and nudge up some of its half-yearly price and growth forecasts. Kuroda said last week that inflation for the fiscal year ended in March likely beat the central bank’s 0.7 percent projection.
Core consumer prices, the BOJ’s key inflation gauge, were falling an annual 0.4 percent when Kuroda eased policy. They rose 1.3 percent last month.
Further, April inflation in Tokyo, a bellwether for the nation, hit a 22-year high of 2.7 percent after the tax hike.
Prices at 300 supermarkets nationwide are running roughly flat with year-earlier levels after stripping away the tax-hike impact, according to a daily index compiled by Tokyo University Professor Tsutomu Watanabe.
And before the tax increase, the jobless rate was down to 3.6 percent, a level Kuroda says is near full employment. Growing labour shortages, notably in construction, add to BOJ expectations that as slack disappears from the economy, wages will rise, fuelling a positive growth-and-price cycle.
All of this has brought more unity to the policy board, which had been galvanized into action by Kuroda a year ago but was more recently diverging.
Of Kuroda’s eight fellow board members, half - academic economists Ryuzo Miyao and Sayuri Shirai, as well as market economists Takahide Kiuchi and Takehiro Sato - had expressed concern about stubbornly weak exports and the tax-hike impact.
The dovish Miyao, for example, warned in November that overseas uncertainties left risks to Japan’s economy tilted to the downside. This month he said risks were now evenly balanced.
“We see a strong chance that upward price pressure will broaden as Japan’s economy continues an autonomous and sustainable recovery driven by consumer spending,” he said.
Kuroda’s presentation and confidence has also had an impact.
After the BOJ’s April 8 decision, the first after the tax rise, he declared, “I don’t think there is a need to take additional measures now,” his most direct message yet.
He may have been trying to quash what the BOJ saw as excessive market expectations for an easing, which were heightening ahead of every meeting, said people close to the central bank. Kuroda’s comments hit Japanese stocks and boosted the yen as investors realized the bank was on hold for now.
Accentuating the impact, it was the first post-policy review news conference that media were allowed to show live, instead of having to wait until the questions ended to send their reports.
Market participants could see in real time Kuroda’s smile and hear him answer repeatedly and methodically that Japan was making steady progress toward the inflation target.
“Many market players who saw how he speaks for the first time were surprised at how confident he seemed to be,” said prominent BOJ watcher Izuru Kato, chief economist at Totan Research.
But while Kuroda dampened expectations for an imminent easing, many expect the BOJ will still have to open the monetary spigot further, especially as the economy slows and Abe faces a tough decision on whether to proceed with a planned further increase in the sales tax.
Sixteen of 17 economists in a Reuters poll this month predicted the central bank will ease again this year, with July the most favored month.
And indeed, Kuroda routinely promises that if the BOJ’s assumptions go awry, he will not hesitate to ease again.
Miyako Suda, who served on the BOJ board for a decade until 2011, said the BOJ “will probably maintain its bullish price forecasts for as long as possible and keep policy unchanged until it becomes absolutely impossible to continue arguing that its price target can be met.”
But, she told Reuters, “once he feels something must be done, I think Kuroda will do something quite extraordinary because small steps won’t work.”
Despite the BOJ’s efforts so far and the weaker yen, long-term inflation expectations remain stuck around 1 percent.
The BOJ argues that underlying price rises and expectations of a sustained recovery will boost expectations to 2 percent and anchor them there, but this is a daunting task untested by any other central bank.
The economy has slowed sharply since the “Abenomics” burst in the first half of 2013, the outlook in China and elsewhere is uncertain, Japan’s exports continue to disappoint and investors are unlikely to be forgiving.
Tokyo stocks are up 65 percent and the yen down 22 percent against the dollar since Abe became the hands-on favorite for prime minister in mid-November 2012. But shares and the currency have been range-bound all year, vulnerable to downward shifts in sentiment.
“The first year of QQE was fairly easy,” said another person familiar with the BOJ’s thinking. “The really tough part has only begun.”
Editing by William Mallard and John Mair