Bank of Japan Inflation Forecast May Fall Short of Finance Minister's Goal

Signs of a sustained Japanese economic recovery may spur the central bank to raise its growth projections and discuss predicting an end to deflation at a meeting next week, a survey of economists indicated.

Bank of Japan board members release semiannual economic forecasts after their April 30 gathering in Tokyo. Their median prediction may show an inflation rate of at least zero for the year to March 2012, up from a 0.2 percent drop, according to 14 of 16 economists surveyed by Bloomberg News.

The new projection may reinforce politicians’ calls for the central bank to expand stimulus measures after Finance Minister Naoto Kan said he wants an inflation rate of as high as 2 percent. The International Monetary Fund this week echoed the government’s concern, saying the BOJ may need to do more.

A recovery in prices “would be fragile, and Japan could tip back into deflation with changes in the foreign-exchange rate or oil price conditions,” said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. Political pressure “makes it all the more unlikely the BOJ would embark on an exit strategy,” he said.

Japan, the only Group of Seven nation still reporting consumer-price declines, has been easing policy just as its counterparts in Asia begin to tighten credit as their economies drive the global recovery. The BOJ doubled a lending program for banks to 20 trillion yen ($215 billion) last month and has kept interest rates at 0.1 percent since December 2008.

Hold Off

The survey indicated that Governor Masaaki Shirakawa and his colleagues will hold off on further action next week, with 13 of the 16 economists predicting no change in policy. He and Kan are in Washington for meetings with their counterparts from Group of Seven and Group of 20 nations.

Shirakawa this month said the risk of another recession has “pretty much gone” and he sees “positive signs” for prices. Deputy Governor Kiyohiko Nishimura said this week that “beams of light” are visible in overcoming deflation.

Both policy makers have said they will keep monetary policy “accommodative,” a pledge that’s likely to be affirmed in next week’s semiannual outlook, according to Ryutaro Kono, chief economist at BNP Paribas in Tokyo. The central bank will reinforce that “it won’t hesitate to provide more liquidity if needed,” Kono said.

At Odds

Any forecast by the central bank for consumer prices to stop falling next fiscal year would put it at odds with economists, whose own projections are for a 0.1 percent decline, based on the median estimate in the Bloomberg survey. Prices excluding fresh food, the bank’s key gauge, slid 1.2 percent in February from a year earlier, the 12th straight drop.

“Sure, the economy is recovering, but growth still depends on exports, domestic demand hasn’t gained momentum, and Japan is stuck in chronic deflation,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, who sees prices sliding 0.2 percent next fiscal year.

The analysts surveyed said prices will slip 1.1 percent in the current year ending March 2011, more than the 0.5 percent decrease forecast by the central bank in January.

The policy board will also review its economic growth forecasts at the meeting.

Gross domestic product will expand 2 percent in the current fiscal year and 1.7 percent in the year ending March 2012, according to the median estimate of the 16 economists. In January, the central bank forecast growth of 1.3 percent this year and 2.1 percent in fiscal 2011.

Elpida’s Profit

Elpida Memory Inc. is among Japanese exporters benefiting from a resurgence in global demand, led by Asia. Japan’s biggest maker of computer memory chips this week reported its first annual profit in three years.

Still, politicians are putting pressure on the BOJ to spur the economy as record public debt constrains the government’s ability to provide support. Fitch Ratings said yesterday that “in the absence of sustained economic recovery and fiscal consolidation, government debt will continue to rise.”

Finance Minister Kan told reporters in Washington yesterday that concerns about Japan’s finances may ease when the government releases its fiscal rehabilitation plan in June.

The yield on Japan’s 10-year bond rose half a basis point to 1.32 percent at 9:40 a.m. in Tokyo.

Kan this week told parliament the central bank should aim for inflation of as high as 2 percent. Prime Minister Yukio Hatoyama’s Democratic Party of Japan this week said it plans to include an inflation target in its platform for the July upper house elections.

Shirakawa said in a speech in New York yesterday that central bankers shouldn’t be “too fixated on short-term price stability” because that doesn’t necessarily lead to economic stability.

“The BOJ board will probably stand pat this time,” said Masaaki Kanno, a 25-year veteran of the central bank who is now chief economist at JPMorgan Chase & Co. in Tokyo. “But it’s highly likely that the bank will ease policy further to signal its cooperation with the government in June” when the fiscal plan is released, he said.