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ECONOMY > Economic Policy

BOJ finds itself further behind 2% inflation target

  • October 29, 2016
  • , Nikkei Asian Review , 6:10 a.m.
  • English Press

TOKYO — Facing grim consumer price data, the Bank of Japan is looking at downgrading its price outlook and pushing back the time frame for achieving its 2% inflation target, during its policy meeting next week.


The consumer price index excluding fresh food prices fell 0.5% in September from a year earlier, Japan’s internal affairs ministry announced Friday. That marks the seventh straight negative month. When food and energy prices are omitted, the index remained flat on the year, with the rate of increase down 0.2 point from August.


The latter CPI is considered the “true” gauge of inflation momentum since food and energy prices are volatile. Yet its growth rate has sunk to a level not seen in three years, and is poised to sink into negative territory again.


One reason why prices are so lackluster is that household spending is weak, making corporations unwilling to raise sticker prices. In September, 186 product categories were priced lower, 12 more than the previous month. Even women’s sweaters and men’s suits dipped, despite fall and winter clothes hitting the stores.


Prices for apparel were particularly weak, the internal affairs ministry noted. Furniture and mobile phones also suffered. Spending per household declined 2.1% on the year in September.


Another factor is the yen. The Japanese currency traded for about 103 to the dollar last month, nearly 20 yen stronger than a year earlier. Imports tend to sell for less in yen terms under those conditions. Compounding this are rising shipments of low-cost personal computers and televisions from China and other places. Prices for bacon and other processed foods are also retreating.


Japan’s seasonally adjusted job-to-applicant ratio climbed to 1.38 in September, the labor ministry said Friday — a level not seen in roughly 25 years. The jobless rate came to 3%, according to the internal affairs ministry. The figure dropped 0.1 point from August, approaching full employment for willing and able-bodied workers.


However, corporations are combating labor shortages with part-time employees, who receive less take-home pay. Career-track employees, who make up 60% of the work force, have only received marginal raises. The BOJ will downgrade price outlooks next week citing weak mechanisms concerning pay hikes’ contribution to inflation.


In the “Outlook for Economic Activity and Prices” to be released after the two-day meeting that begins Monday, the BOJ will revise down the assumed year-on-year CPI change for the fiscal year ending March 2017 — from 0.1% inflation to a small contraction. Fiscal 2017’s projection will be downgraded from 1.7% inflation to somewhere around the lower 1% to 1.5% range.


The central bank is leaning toward extending the time frame for achieving 2% inflation. The wording could change from “during fiscal 2017” to “during fiscal 2018.” BOJ Gov. Haruhiko Kuroda is due to step down in April 2018, meaning the bank would effectively be giving up on reaching its stated goal during his term.


However, a survey of 42 economists shows that the CPI is expected to rise by 0.6% on average in fiscal 2017, and 0.9% in fiscal 2018.


The financial markets have become relatively stable since the BOJ pivoted to interest rate controls in late September. The bank does not plan to introduce expanded easing measures next week, opting instead for the wait-and-see approach. The BOJ is also adopting a long-term strategy for attaining 2% inflation, though observers say the monetary policy avenue is nearing a dead end.

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