The BoJ did upgrade its view of capital expenditure and turns more optimistic about industrial production, showing more confidence in domestic demand before a sales tax increase scheduled for April 1. However, this optimism is unlikely to ease concerns that domestic demand will weaken after the tax hike and that exports will not be strong enough to support growth, which could increase calls for more monetary stimulus.
It is not an atmosphere where the BoJ will ease immediately even if it downgrades growth forecasts as core consumer prices have been hovering in a range higher than previously expected, said Junko Nishioka, chief economist at RBS Securities. If the yen appreciates sharply and share prices plunge due to geopolitical risks, including the Ukraine, the BoJ will have to move.
As expected, the central bank on Tuesday maintained its pledge of increasing base money, its key monetary policy gauge, at an annual pace of 60-70 trillion yen ($590-$690 billion). The BoJ launched the stimulus last April, saying it would lift inflation to 2% within around two years via aggressive asset purchases as it sought to end 15 years of deflation. The BoJ said that exports have levelled off recently, which was a downgrade from last month, when the BoJ said exports were on a recovery path.
Japan posted a record current account deficit in January due to consistently weak exports, undermining the BoJs argument until now that exports would eventually pick up pace as the US economy recovers.
The central bank said capital expenditure is showing clear signs of recovery, more positive than its assessment that business investment is recovering. The BoJ also said industrial production is rising at a slightly faster pace. Recent strength in industrial output, and signs companies are more willing to invest in factories and equipment as consumers buy more goods before the tax hike, likely encouraged optimists within the BoJ to take a more positive view of domestic demand. The labour market is tightening, backing its view the economy will continue a gradual recovery and its 2% inflation target is achievable over the next 12 months or so.
Kuroda has been confident the economy can survive the short-term shock when the sales tax rate rises to 8% from 5% on April 1, but some economists worry growth could falter.
Core consumer inflation reached a five-year high of 1.3% in January, supporting the BoJs view that it will stay above 1% and accelerate again later this year. Some BoJ officials think prices are rising a tad faster than expected. A Reuters poll last month showed economists expect the BoJ to ease policy further around the middle of the year, as it will otherwise be difficult to meet the inflation target.
Yen-pinching undercuts push against years of deflation
The loose change in Yusa Nishimuras purse could be undermining Prime Minister Shinzo Abes economic recovery plan for Japan. As often as she can, Nishimura tucks away 500-yen coins, worth a little under $5. Cash nest eggs like Nishimuras made sense in slow-growing Japan, where during 15 years of deflation her money was worth more as time went on. But as Abe faces pressure to show results in his fight to lead Japan out of deflation, he is urging cash hoarders like Nishimura to change their modest mind-sets for the economys sake, as well as for their own. For most countries, moderately rising prices are a normal part of life. But in Japan, overall prices have not risen since the late 1990s.
Abe hopes his policies will change that. Since coming to power in late 2012, he has pursued aggressive economic and monetary policies to bring an end to deflation. His first measure, a blast of monetary policy that has doubled the countrys money supply, has already elevated prices by weakening the yen and pushing up the cost of energy and food imports. The slow progress in beating deflation reflects the difficulties of overcoming entrenched expectations and behaviours, especially among younger Japanese who have never experienced rising prices, said Taro Saito, senior economist at the NLI Research Institute in Tokyo. Older generations still remember the oil shocks of the 1970s, which sent consumer prices soaring, as well the countrys asset bubble of the 1980s. But with deflation the norm for years now, younger Japanese tend to expect far less inflation than their seniors, according to a survey taken last year by the Cabinet Office. This helps makes younger Japanese more cautious spenders, as well. Some economists are beginning to question whether the obstacles to beating deflation lie with Abes policies, and not with consumers. Inflation should be driven by actual demand for goods and services, said Shinya Imura, economics professor, Chuo University in Tokyo. But whats happening now is something else. Businesses are raising prices because theyre being squeezed by higher input costs. That means they are unlikely to have the means to raise wages soon, and consumers arent going to buy more.
This dynamic is clear at the Manrai ramen shop, a Tokyo institution loved by locals for its pork and leek broth and a long-standing commitment to rock-bottom prices. When Manrai recently raised the price of its cheapest bowl of ramen for the first time in over two decades, to 250 yen from 200, it caused consternation. I cant believe it, said Ryo Kobayashi, a recruitment agency worker and Manrai regular. If prices start rising everywhere, Im not going to be able to eat out anymore. NYT