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BOJ says economy expanding for 1st time in 9 yrs, but cuts price view

  • April 27, 2017
  • , Kyodo News , 19:28 p.m.
  • English Press

The Bank of Japan upgraded its assessment of Japan’s economy Thursday, using the word “expansion” for the first time since 2008, but it maintained its aggressive monetary easing measures while lowering its already tepid inflation forecasts for the next two years.

 

In a quarterly economic outlook report, the central bank trimmed its inflation outlook for this year and next. And given downside risks to prices, such as from escalating tensions in the East Asian region, economists say the BOJ view on inflation is still too optimistic.

 

Governor Haruhiko Kuroda told a press conference following a two-day policy board meeting that the BOJ’s 2 percent inflation target can be achieved “around 2018” as momentum toward it is “maintained.” But speculation is rife that the bank will fail to attain the goal during his term through April 2018.

 

“Japan’s economy has been turning toward a moderate expansion” on the back of global economic growth and recovery in domestic demand, the BOJ said in the quarterly report, adding it is “likely to continue its moderate expansion.”

 

The central bank said the Japanese economy will expand 1.6 percent in real terms in fiscal 2017 through next March, and by 1.3 percent in fiscal 2018, both up from forecasts of 1.5 percent and 1.1 percent in January.

 

But the core consumer price index, which excludes volatile fresh food prices, is now projected to rise just 1.4 percent this fiscal year, down from 1.5% forecast previously, the BOJ said.

 

In fiscal 2018, a 1.7 percent increase is projected.

 

“With regard to the outlook for prices, risks are skewed to the downside, especially those concerning developments in medium- to long-term inflation expectations,” the bank said.

 

Naohiko Baba, chief economist at Goldman Sachs Japan Co., said, “We think the BOJ is likely to continue to lower its price outlook in future outlook reports, given the inflation outlook is still quite bullish and the BOJ highlighted the downside risks.”

 

Takeshi Minami, chief economist at the Norinchukin Research Institute, echoed that view, saying the possibility is “low” that inflation will accelerate anytime soon as wage growth is tepid, preventing private spending from expanding sharply.

 

The BOJ will “make policy adjustments as appropriate” in a bid to attain its 2 percent inflation goal,” Kuroda said.

 

In February, the core CPI rose 0.2 percent from the previous month, after it edged up 0.1 percent in January — the first increase in 13 months — due largely to higher energy prices and a weaker yen.

 

But the core CPI for Tokyo’s 23 wards, seen as indicating nationwide price moves down the road, declined 0.4 percent in March, after dropping 0.3 percent in February.

 

Many analysts say the figures indicate the pace of price growth across Japan is expected to slow, sparking prospects that the BOJ will make more efforts to achieve its inflation goal.

 

Kuroda said, “It’s too early to discuss an exit strategy” from the bank’s large-scale monetary easing, adding detailed talks on the issue would “rattle financial markets.”

 

Growing geopolitical risks surrounding North Korea, which could drag down market and economic developments ahead, may also force the central bank to continue implementing drastic easing measures for the time being, BOJ watchers said.

 

In its outlook report, the BOJ cited “geopolitical risks” as one of the downside risks to the Japanese economy, along with political confusion in Europe following Britain’s vote last year to leave the European Union.

 

“We have to watch how geopolitical risks will affect financial markets, the global economy and economic and price conditions in Japan,” Kuroda said, adding, “The central bank is always simulating how it would act in any situation.”

 

Kuroda’s remarks came as fears are growing that rising geopolitical risks could drive up the Japanese yen, regarded as a relatively safe-haven asset.

 

The appreciation of the yen usually undermines Japan’s export-oriented economy by making Japanese products more expensive abroad and decreasing the value of overseas revenue in yen terms. It also lowers import prices. Japan depends on imports for over 90 percent of its energy needs.

 

Last September the central bank adopted a “yield curve control” policy, aimed at keeping the 10-year government debt yield around zero percent by adjusting the amount of its bond buying, while leaving unchanged at minus 0.1 percent the amount paid on a portion of commercial bank reserves kept at the BOJ.

 

As the U.S. Federal Reserve has started to tighten credit, the yen has so far plunged about 10 percent against the dollar since the U.S. presidential election in November amid mounting expectations that the U.S.-Japan interest rate gap will widen.

 

==Kyodo

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