The Bank of Japan will likely cut next fiscal year’s inflation forecast only slightly and largely maintain its upbeat view for 2018 at a policy review next week, sources said, an outlook which could allow it to argue there is no need for imminent monetary easing.
Hyped-up speculation of radical BoJ policy action has whipsawed financial markets in recent weeks, but easing may now be too close to call.
While falling import costs from a strong yen and weak consumption will weigh on inflation, such risks will be tempered by a boost to growth from an anticipated fiscal stimulus package and a delay in next year’s sales tax hike, sources familiar with the bank’s thinking said.
Prime Minister Shinzo Abe has said the government will announce a large spending package by the end of this month.
“The boost from an expansionary fiscal policy suggests any downgrade to the BoJ’s inflation forecast won’t be too big,” said one of the sources.
“The positive impact (of the government’s stimulus package) will be biggest in fiscal 2017,” another source said on condition of anonymity due to the sensitivity of the matter.
The BoJ now expects core consumer inflation to hit 1.7% in the next fiscal year beginning in April 2017, far above private forecasts of 0.8%.
In a quarterly review of its projections to be conducted at a policy meeting on July 29, the nine-member board is likely to cut the forecast to around 1.5%, the sources said.
It is seen roughly maintaining the 1.9% inflation forecast for fiscal 2018, which would back its view that Japan is on track to achieve its price target, they said. The dollar briefly fell below 106 yen on the report, which tempered somewhat expectations of additional monetary easing.
“The concern of markets for Japan is that these (measures) are going to fall shy.
Until Abe comes down with a fiscal package there’s a worry that they’re going to undershoot and the combination of these stories is what’s helping the yen,” said a dealer with one large international bank in London.
It is uncertain whether the BoJ can avoid pushing back again the deadline for hitting its inflation target, which is now set at “around fiscal 2017,” the sources said. While many policymakers are wary of using their dwindling policy options now, they may pull the trigger if they feel the delay could hurt already weak inflation expectations, they said.
There is near-consensus in the market that the BoJ will sharply cut its inflation forecasts and ease next week to show its determination in hitting the goal. But investors betting the BoJ will ease next week could be riding for a fall, as the yen’s recent weakening and the planned fiscal spending package take some pressure off the bank to step up its massive stimulus programme.
The yen hovered above six-week lows yesterday after BoJ governor Haruhiko Kuroda repeated his long-held view that he saw no need to deploy “helicopter money,” a policy under which the central bank underwrites government debt by accepting perpetual bonds.
Kuroda has also reiterated, however, that the BoJ is ready to act if risks threaten achievement of its price target.