Japan's
central bank will cut its inflation forecasts but hold off expanding stimulus
this month, people familiar with the matter say, in another sign the bank is
retreating from
Governor Haruhiko Kuroda's initial pledge to do whatever it
takes to achieve his ambitious inflation target.
The
inflation downgrade would be a fresh blow to Kuroda less than a year before his
tenure ends next April, and underscores the challenges the central bank faces
in using monetary stimulus to both lift prices and convince the public that its
policies are working.
The Bank of
Japan's nine-member board will seek to explain why the strength in the economy
has yet to translate into inflation, a dilemma they are struggling with as
wages and prices remain stubbornly weak, say sources familiar with its
thinking.
"Given
the economy is in such a good shape, it's hard to explain why inflation remains
so weak. This will be among key topics of debate at this month's BOJ
meeting," said one of the sources, a view echoed by two other sources.
At a rate
review on July 19-20, the BOJ is set to keep monetary policy steady and offer a
more upbeat assessment of the economy than it did in June to say it is
expanding moderately, reflecting robust business sentiment and consumption, the
sources said.
But the BOJ
is likely to cut its inflation forecast for the current year ending in March
2018, and possibly that for the following year, in a quarterly review of its
long-term projections to be released on July 20, they said.
At its April
policy meeting, the BOJ said it expects core consumer inflation to hit 1.4
percent in the current fiscal year and 1.7 percent in fiscal 2018. That exceeds
a Reuters poll projecting inflation of 0.7 percent in the current year and 0.8
percent the following year.
The
downgrades will likely be minor and reflect the effect of recent oil price
falls, companies' reluctance to raise prices and weak inflation expectations,
the sources said.
DEARTH OF
AMMUNITION
Japan's
economy expanded an annualized 1.0 percent in the first quarter on robust
exports and household spending, while business confidence hit a three-year high
in the three months to June, adding to signs the economic recovery is gaining
pace.
But core
consumer prices rose just 0.4 percent in May from a year earlier, well below
the BOJ's 2 percent target. Tokyo inflation, a leading indicator of nationwide
prices, was flat in June from a year earlier, stunning BOJ officials who
expected a stronger reading given recent signs of life in consumption.
Despite the
gloomy outlook on inflation that could lead to further delays in achieving its
price target, the BOJ is wary of ramping up stimulus due to a dearth of policy
options.
"The
economy is in good shape, so it's time to wait for the positive effects to push
up prices," one of the sources said.
The sources
say the BOJ will only act if a severe external shock, such as an unwelcome yen
spike, threatens the recovery.
The
reluctance to ease contrasts with Kuroda's pledge four years ago that he
"won't hesitate to act" to hit his target.
"If the
BOJ were to loosen policy, it will deepen negative interest rates or lower its
bond yield target. Either way, the cost would be huge, so the bank won't act
easily," said Izuru Kato, chief economist at Totan Research.
Reuters
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