April 26, 2013 / 12:10 AM / in 5 years

UPDATE 4-BOJ in credibility test as divisions emerge over inflation target

* Policy on hold; releases economic forecasts
    * Private-sector inflation forecasts are lower than BOJ's
    * Core CPI fell 0.5 pct yr/yr in March, data shows
    * Two board members dissent over inflation target timing

    By Leika Kihara and Stanley White
    TOKYO, April 26 (Reuters) - Bank of Japan policymakers are
divided over whether the central bank can meet its inflation
target in two years, underlining concerns it has set an
unrealistic goal in its battle to end 15 years of deflation
despite plans for a massive burst of monetary stimulus.
    The central bank held off on offering any fresh policy
initiatives following the April 4 policy meeting, when new
Governor Haruhiko Kuroda stunned markets by promising to inject
about $1.4 trillion into the economy to hit the 2 percent
inflation target in roughly two years.
    The BOJ's semi-annual economic report, which is based on
forecasts from the BOJ board's nine members, showed the degree
to which other policymakers share Kuroda's view.
    Their median forecast shows they expect core consumer
inflation, the central bank's preferred gauge for price trends,
to reach 1.9 percent in the year to March 2016, close to the
bank's target. But the forecasts of the board members ranged
widely, from 0.8 percent to 2.3 percent.
    And while the BOJ officially said it expected to achieve 2
percent inflation towards the latter half of its projection
period out to March 2016, board members Takahide Kiuchi and
Takehiro Sato dissented against that view, underlining the
division in the board.
    "The BOJ's inflation forecast is quite ambitious and
probably pretty hard to achieve," said Yuichi Kodama, chief
economist at Meiji Yasuda Life Insurance in Tokyo.
    "There's no guarantee that by expanding base money, the BOJ
can heighten inflation expectations," he said. "It would be
tough to achieve 2 percent inflation in Japan with monetary
easing alone."
    A gap in the views of future inflation 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
    In a reminder of the task ahead, data on Friday showed core
consumer prices fell from a year earlier for the fifth straight
month in March, even as the yen's recent fall pushed up import
costs. Core prices, which include all items except for volatile
food costs, fell 0.5 percent.
    Kuroda has vowed to do whatever it takes to achieve its
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.

    The BOJ's median projection is much higher than the
forecasts of 10 private-sector economists gathered in a Reuters
poll this week. The poll shows a median forecast for core
inflation of around 1 percent in 2015/16, almost half the BOJ
    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.
    "When the BOJ updates these forecasts again, there could be
speculation that it will increase debt purchases again because
it won't be close to meeting its target," said Hiroaki Muto,
senior economist at Sumitomo Mitsui Asset Management Co.
    "With yields already so low, this could make banks afraid to
buy more government debt."
    The BOJ reiterated its 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.
    "Personally, I think many on the board feel that inflation
will reach around 2 percent in the first half of fiscal 2015,"
Kuroda told reporters, referring to the year to March 2016.
    The BOJ report forecast stronger economic growth in the next
few years than it had projected in January and higher inflation.
    It suggested that the fall in the yen, as Prime Minister
Shinzo Abe has pushed through aggressive policies to lift the
economy, will boost exports and put upward pressure on nominal
wages. Higher wages are critical to getting Japanese consumers
spending again after years of deflation.
    "Quantitative and qualitative monetary easing is expected
not only to work through such transmission channels as long-term
interest rates and asset prices, but also to lower real interest
rates through a pickup in inflation expectations," the BOJ said
in its report.
    The BOJ forecasts that core consumer inflation, excluding
the impact of an expected hike in the national sales tax, would
reach 1.4 percent in 2014/15, higher than its January projection
of 0.9 percent.
    A Reuters 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, about a third of the pace projected by the BOJ. The poll's
forecasts also excluded the expected hike in the sales tax.
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