BOJ stands pat, to face credibility test with new forecasts

The Bank of Japan will probably project on Friday that it will meet its 2 percent inflation target in two years due to its massive stimulus plan, a forecast analysts say may be too optimistic and which could put its credibility on the line.

In a reminder of how ambitious and stiff the target is, data on Friday showed core consumer prices marked their fifth straight month of annual declines in March even as the yen's recent falls pushed up import costs.

The central bank, charged with overturning years of dogged deflation, held off on offering any fresh policy initiatives after new Governor Haruhiko Kuroda had stunned markets on April 4 by promising to inject about $1.4 trillion into the economy to hit the inflation target in roughly two years.

Now, the focus will be on the BOJ's economic forecasts to be released in its twice-yearly outlook report in a few hours time and how they compare with private-sector economists, many of whom argue that achieving 2 percent inflation in two years is unrealistic.

"Even under a very optimistic growth forecast, it's hard to predict Japan seeing 2 percent inflation in two years. The BOJ will have to come up with a logic quite different from the past to explain why it thinks the target is achievable," said Junko Nishioka, chief Japan economist at RBS Securities.

"If evidence piles up that progress in meeting the price target is too slow, the central bank may come under pressure to ease again at its quarterly review of growth projections in July and October," she said.

Kuroda has vowed to do what ever it takes to achieve the price target in two years, putting the central bank's reputation on the line to restore an inflation level that has rarely been hit since the early 1990s.

DILEMMA

Core consumer prices, which exclude volatile food but include oil costs, fell 0.5 percent in March from a year earlier, roughly matching a median market forecast for a 0.4 percent decline, government data showed on Friday.

The BOJ reiterated on Friday a pledge to expand base money, its new policy target, at an annual pace of 60 trillion yen ($604 billion) to 70 trillion yen. Base money is the combined amount of cash and deposits parked with the central bank.

The BOJ is likely to forecast that core consumer prices will rise about 1.5 percent in the fiscal year to March 2015, sources have said. That is above its current forecast for a 0.9 percent increase. It excludes the impact of an expected sales tax increase in 2014.

It is also likely to add an extra year to projections to show that by the fiscal year ending March 2016, the core consumer price index will be rising at a pace of 2 percent over a year earlier, meeting the BOJ's inflation target, the sources said.

But such forecasts, based on the median expectations of the BOJ's nine board members including Kuroda, will be much higher than private-sector projections.

A poll this week of 10 analysts showed most of them expect core CPI to rise around 0.5 percent in the year to March 2015, a third of the pace that the BOJ is expected to project. They forecast core inflation of around 1 percent in fiscal 2015/16, half the pace expected in the BOJ's numbers.

That poses a dilemma for the BOJ because its policy relies so much on shaping market and public expectations, or trying to nudge people into spending more on the belief that prices will finally start to rise in the future.

A lack of progress in meeting the target may undermine public expectations of future price moves and force the BOJ into taking further monetary action despite unleashing the world's most intense burst of monetary stimulus earlier this month, some analysts say.

(Additional reporting by Kaori Kaneko and Tetsushi Kajimoto; Editing by Neil Fullick and Shri Navaratnam)