October 24, 2014 / 9:31 AM / 5 years ago

Japan's economy floundering, BOJ to widely miss inflation goal: poll

TOKYO (Reuters) - Japan’s economy is floundering and analysts polled by Reuters cut their annual growth forecast for a fifth straight month, saying there is no chance the Bank of Japan will meet its 2 percent inflation goal by the next fiscal year.

With demand still suffering from an April sales tax hike and disappointing factory output, most analysts expect the BOJ to ease policy further before the fiscal year ends in March.

The majority expect that to happen early in 2015.

The BOJ launched an unprecedented burst of monetary stimulus last April aimed at reflating the economy, pledging to double the monetary base to 270 trillion yen ($2.50 trillion) over two years, which has helped to send the yen down about 15 percent against the dollar.

But not a single economist polled said that it would succeed in getting inflation to the 2 percent target by fiscal 2015/16. It was last at 1.1 percent, without the tax hike effect.

“The inflation goal gets out of sight,” wrote Stefan Grosse of NORD LB.

Consumer price inflation without the April sales tax hike effect will probably rise 1.1 percent in this fiscal year and next, roughly in line with the previous survey.

But with oil prices falling sharply, all central banks are soon going to be faced with lower inflation, which is particularly worrying for the BOJ and the European Central Bank as deflation risks loom.

That means those inflation forecasts are likely going to be chopped in coming months.

“The global economy is not helping the plans of (Prime Minister) Shinzo Abe. Low commodity prices are bad news if the Bank of Japan is absolutely fixed on the inflation goal,” said Grosse.

The economy will grow just 0.2 percent for the fiscal year to March 2015, a Reuters poll of 24 analysts showed, down from a 0.3 percent projection made last month and falling from a 1.0 percent growth forecast in May.

They project only 1.3 percent growth in the next fiscal year starting April 2015, with a slowdown from that in 2016/17 to 1.2 percent, unchanged from September’s poll.

“The likelihood of economic stagnation has been rising,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

During the third quarter, the economy probably rebounded an annualized 2.9 percent, according to the poll, but that would be less than a half of the 7.1 percent contraction in the second quarter, the biggest contraction since early 2009, after the sales tax hike bit harder than expected.

That also is a sharp downgrade from 3.6 percent growth forecast in the September Reuters poll. But economists expect 2.1 percent expansion in the fourth quarter, unchanged from last month’s projection.

Even with the prospect of economic stagnation, thanks in part to the April tax hike, a majority of analysts said they expect the government to proceed with plans for another sales tax hike next October.

But not all of them think that’s a good idea.

“Given the prospects of a slower global growth, it would be difficult for the prime minister to risk another tax hike slump on the economy,” said Grosse.

At its next policy meeting on Oct. 31, the BOJ is preparing to roughly halve its 1 percent economic growth forecast for this fiscal year, but keep policy unchanged and maintain its prediction that inflation will hit its 2 percent target in the year from next April.

Abe is set to make a final decision by the end of this year on whether to proceed with the second sales tax hike to 10 percent from 8 percent, after examining economic data to see if the economy can withstand it.

The poll showed 18 of 21 analysts predict the government will raise the tax as planned, while three said it would postpone it, hardly changed from last month’s survey.

Adding to gloomy views on the economy, the recent resignation of two important cabinet ministers have raised worries about Abe’s government and the fate of the second tax hike.

Polling by Kaori Kaneko and Sarbani Haldar; Editing by Ross Finley & Kim Coghill

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