Bank of Japan Holds Foot on Economic Accelerator

The Bank of Japan projected for the first time on Wednesday that inflation will exceed 2 percent roughly two years from now, underscoring its conviction that a sustained end to deflation is on the horizon without additional stimulus.

Governor Haruhiko Kuroda maintained his optimism on the outlook, saying that he saw no delay in the timing for meeting the bank's inflation target.

Kuroda noted that the economic impact of a sales tax increase this month appeared limited so far.

But he quickly added the BOJ is ready to expand stimulus further if risks threaten achievement of the price target.

"The slump after the April tax hike is within expectations and so far, household spending is sustaining momentum," Kuroda told a news conference after a BOJ policy meeting.

"As a whole, we're making steady progress. But we're still halfway through meeting the target, so we'll closely monitor the situation and make adjustments when necessary," he said.

As widely expected, the BOJ earlier in the day maintained its pledge to increase base money, its key policy gauge, at an annual pace of 60 trillion to 70 trillion yen ($588-$686 billion).

In fresh projections laid out in a twice-yearly report, the BOJ said consumer inflation will likely reach 2 percent around the next fiscal year beginning in April 2015, and be sustained in a "stable manner" as the economic recovery continues.

The upbeat projection may reinforce market expectations that the BOJ will stand pat on policy until July or even longer, a view that spread after Kuroda last month said he saw no immediate need to expand stimulus for the time being.

Prior to those comments, a few economists had expected further easing as early as the April 30 meeting. Many still predict inflation will peak out around May data as the price-boosting effect of the weak yen wanes.

Still, the BOJ maintained its forecast made three months ago that core consumer inflation will hit 1.3 percent in the current fiscal year ending in March 2015, and accelerate to 1.9 percent the following year, excluding the tax hike effect.

In projections for fiscal 2016, which were issued for the first time, the central bank forecast core consumer inflation to reach 2.1 percent, signaling it remains confident its price target will be achieved.

"The BOJ emphasizes improving job markets as something that will help achieve it price target even after the boost on prices from a weak yen fades," said Koichi Haji, chief economist at NLI Research Institute.

NOT SO BRIGHT?

The BOJ has stood pat since offering an intense burst of monetary stimulus in April last year, when it pledged to double base money to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases.

The increase in the sales tax - to 8 percent from 5 percent - has sparked worries that consumers will curb their spending, threatening the economic recovery that Prime Minister Shinzo Abe has engineered with aggressive monetary and fiscal stimulus.

But the central bank has remained optimistic that the economy can withstand the pain without additional stimulus. It also sees a tightening job market leading to higher wages that will help accelerate inflation towards its price target, a point Kuroda stressed as something that is already happening.

The BOJ's projections, however, remain much bullish than market forecasts that see core consumer prices rising just 1.0 percent in the current fiscal year and 0.9 percent the following year.

And while the nine board members generally share Kuroda's optimism on the outlook, differences remained on how quickly or smoothly they see the price target being achieved.

Two economists turned board members, Takahide Kiuchi and Takehiro Sato, repeated their dissent made in October against the projection that there is a "high chance" the price target can be achieved. Another member, Sayuri Shirai, disagreed on the timing for reaching the price target.

Signs from the economy have been mixed so far.

Core consumer inflation in Tokyo, a leading indicator of national trends, jumped to a 22-year high of 2.7 percent in April in a sign that companies are making progress in passing on the tax increase to consumers.

While total wages rose 0.7 percent in the year to March to mark the first increase in three months, regular pay fell for the 22th straight month in a sign firms are hesitant yet to increase fixed personnel costs.

Industrial production rose a less-than-expected 0.3 percent in March and manufacturers expect output to slide in April, data showed on Wednesday, a sign the recovery in the world's third-largest economy remains fragile.

The BOJ issues its long-term economic and price forecasts in a semiannual report produced in The Bank of Japan projected for the first time on Wednesday that inflation will exceed 2 percent roughly two years from now, underscoring its conviction that a sustained end to deflation is on the horizon without additional stimulus.