TOKYO: Brightening global growth prospects will allow Japan’s central bank to keep monetary policy steady this week and invest time solving the puzzle of why inflation remains stubbornly low despite a tightening job market and robust economic recovery.
At the two-day rate review ending on Thursday, the Bank of Japan (BoJ) is set to offer a more upbeat assessment of the economy than it did last month as a pick-up in overseas demand bolsters exports and factory output, sources have said.
But central bank policymakers still have little to cheer about with consumer inflation barely above zero per cent, as soft household spending discourages companies from raising prices.
And looming geopolitical risks, such as escalating tensions over North Korea, overshadow otherwise upbeat prospects for the global and Japanese economies.
“Japan’s economy is recovering and expanding steadily as a trend,” BoJ Governor Haruhiko Kuroda said last week, offering a brighter view than the central bank’s current assessment that a moderate recovery trend was in place.
“But price momentum, while sustained, lacks steam,” he added, signalling anew that the BoJ will maintain its massive monetary stimulus for the time being.
With the economy in good shape, the BoJ is widely expected to leave unchanged its commitment to guide short-term interest rates at minus 0.1 per cent and the 10-year government bond yield around zero per cent through aggressive asset purchases.
Analysts also expect the BoJ to maintain a loose pledge to keep increasing its government bond holdings by 80 trillion yen per year.
Japan’s economy has shown signs of life, as exports rose the most in over two years in March and manufacturers’ confidence climbed to the highest since the global financial crisis a decade ago.
But core consumer prices for February rose just 0.2 per cent from a year earlier, keeping markets doubtful of the BoJ’s forecast inflation will hit its 2 per cent target by March 2019.
At a quarterly review of its long-term projections to be released on Thursday, the BoJ may slightly cut this fiscal year’s inflation forecast but project price growth accelerating steadily towards its target in subsequent years, say sources familiar with its thinking.
“The BoJ’s price forecasts are too optimistic, so there’s a very high chance they will be revised down.
This may happen at its quarterly forecast review in April,” said Kazuo Momma, a former top BoJ economist.
In the current forecast made in January, the BoJ expects core consumer inflation to hit 1.5 per cent in the year ending in March 2018, followed by 1.7 per cent in fiscal 2018. — Reuters
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