BOJ Inflation Prediction to Show Ultra-easy Policy Limits

The Bank of Japan should estimate that inflation will stay short of its 2% target for the first time. That will be beyond Governor Haruhiko Kuroda’s term through early 2023, according to sources.

It is also likely to cut this fiscal year’s inflation forecast reflecting cuts in cell phone charges. This highlights the challenge it is facing in changing Japan’s deflationary mindset.

Such projections would reinforce expectations the BOJ will maintain its massive stimulus for the foreseeable future. These projections are to be made in fresh quarterly estimates and are due out next week.

The BOJ will warn of the strains on consumption from a recent resurgence in COVID-19 infections with the country’s robust exports, the sources said.

One of the sources said that solid external demand is helping Japan’s economy. However, fresh pandemic-related curbs cloud the outlook.

Another source said it would take time for inflation to pick up, with the underlying weakness in price growth. Two other sources have agreed on this view.

On support from exports, Japan has emerged from last year’s slump caused by the coronavirus pandemic. Slow vaccine rollouts and renewed curbs to contain the virus, however, were clouding the outlook. 

Interest Rates

The Bank of Japan should maintain its short-term interest rate target at -0.1%. Additionally, for long-term rates, around 0%. This will be at the two-day rate review ending on April 27. 

For the year that began in April from the current 0.5%, the BOJ trimmed its core consumer inflation forecast. This was a quarterly report that is due out after the meeting.

For the first time, they said, it will also release forecasts for fiscal 2023, which will show inflation hovering around 1%.

Downbeat price forecasts should come to as little surprise to the markets. Moreover, they would mark a symbolic defeat for Kuroda, whose five-year term ends in April 2023.

Years of heavy money printing did not fire up inflation to the BOJ’s target. This forced it to maintain an extended period that was initially intended as a quick fix to beat deflation.

Also, in the report, the central bank may revise this year’s growth forecast. It may offer a more upbeat assessment of the economy compared to that of three months ago. Strong U.S. and Chinese growth, the sources said, underpins exports.

The BOJ, however, will warn that any recovery will be modest, they said, as a resurgence in infections hurt consumption.

Furthermore, it expects the economy to grow 3.9% this fiscal year and expand 1.8% the following year. This was based on current projections made in January.