BOJ Keeps Rates Unchanged, Postpones 2% Inflation Deadline

The Bank of Japan kept its monetary stimulus program unchanged even as it pushed back the projected timing for reaching 2 percent inflation for a sixth time.

The central bank pledged to maintain its yield-curve control program and asset purchases, a result predicted by all 43 economists surveyed by Bloomberg. The BOJ now expects to hit its 2 inflation target around the fiscal year starting in April 2019, a year later than a previous projection. It also cut its price estimates for the current and next fiscal years.

The changes underscore the BOJ’s slow progress toward its price goal at time when other major central banks are turning toward normalizing their monetary policy after years of stimulus. The European Central Bank, which is said to examine options for winding down quantitative easing, concludes its own governing council meeting later on Thursday.

“The BOJ has already pushed out the timeline several times. Now four years have passed, and there is no sign the inflation rate is rising,” Masaaki Kanno, chief economist at Sony Financial Holdings Inc. in Tokyo and a former BOJ official, said on Bloomberg TV. Kanno warned that the central bank risks drying up the market for Japanese government bonds before reaching its price goal.

The latest fiscal year forecasts from the BOJ are:

  • 2017 core inflation of 1.1%; down from previous forecast of 1.4%
  • 2018 core inflation of 1.5%; down from previous forecast of 1.7%
  • 2019 core inflation of 1.8%; down from previous forecast of 1.9%
  • 2017 gross domestic product of 1.8%; up from previous forecast of 1.6%
  • 2018 gross domestic product of 1.4%; up from previous forecast of 1.3%
  • 2019 gross domestic product of 0.7%; unchanged from previous forecast
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“The BOJ isn’t publishing its forecasts to predict future prices, but to boost inflation expectations,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. “That’s why they are in a tough position and end up putting out unrealistic numbers.”

Governor Haruhiko Kuroda has a press conference scheduled for 3:30 p.m. in Tokyo, where he’s likely to be questioned over the estimates and progress of his monetary program. But he can point to the current economic expansion, and the tightest labor market in decades, to help drive inflation higher.

Lowering its inflation forecasts has become routine for the BOJ, which has done so in every update since October 2014. Former BOJ chief economist Hideo Hayakawa said last week that the BOJ will eventually be forced to acknowledge that it will need to continue its easing program for several more years to come.

The central bank noted in its statement Thursday that the risks to inflation and economic growth are skewed to the downside.

Meanwhile, the BOJ faces growing questions about the sustainability of its easing program, and pressure to explain when, and under what conditions, it might begin an exit. The BOJ’s asset buying, mainly of Japanese government bonds, has swelled its balance sheet to nearly the same size as Japan’s economy. Some BOJ officials are increasingly concerned about the sustainability of its purchases of exchange-traded funds, according to people familiar with the matter.

Other central banks are well ahead of it. The ECB could make a decision on options for winding down stimulus this autumn, according to euro-area officials familiar with the matter. Federal Reserve Chair Janet Yellen said last week that the Fed should begin shrinking its balance sheet “relatively soon,” while the Bank of Canada has raised rates for the first time in seven years.

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Kuroda aimed to achieve 2 percent inflation in about two years when he launched unprecedented stimulus in April 2013. He has acknowledged the stickiness of Japan’s “deflationary mindset,” as services from convenience stores to restaurants cut business hours instead of securing the workers they need by raising pay.

“It’s increasingly likely that Kuroda won’t see inflation come close to the goal” by the time his term ends in April next year, said Hiroshi Watanabe, an economist at Sony Financial Holdings Inc. “Japanese companies don’t have enough confidence in raising prices after decades of stagnation.”