Japan Inc's inflation expectations stagnate, keep BOJ under pressure

TOKYO (Reuters) - Japanese companies’ expectations for inflation over the next year stagnated, a Bank of Japan survey showed on Tuesday, adding pressure on the central bank to expand stimulus as the bitter U.S.-China trade war clouds economic prospects.

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Companies expect consumer prices to have risen 0.9% a year from now, unchanged from their projection three months ago and well below the BOJ’s 2% inflation target, according to the central bank’s detailed “tankan” survey for June.

Firms expect consumer prices to have risen by an annual 1.0% three years from now, down slightly from 1.1% in the previous survey. Companies also saw inflation at 1.1% five years ahead, unchanged from three months ago.

The survey underscores the challenge of the BOJ’s monetary experiment that aims to boost inflation expectations with heavy money printing, in hope of prodding companies and households to boost spending now rather than save.

“Six years have past since the BOJ deployed a radical stimulus and there’s no sign inflation expectations are approaching its 2% price target,” said Yasunari Ueno, chief market economist at Mizuho Securities.

“There’s also no change to Japan’s deflationary structure created by a mix of a lack of demand and excess capacity.”

The BOJ is maintaining a massive stimulus program to sustain a moderate economic expansion, so that companies will gradually raise wages and help push up inflation to its target.

But slowing global demand and simmering trade tensions have hurt Japan’s exports. An abstract of the tankan on Monday showed big manufacturers’ confidence hit a near three-year low in the quarter to June, in yet another sign of the toll exerted by the trade war.

With capital expenditure holding up and non-manufacturers’ sentiment improving, the BOJ likely sees few reasons to ramp up monetary support for the economy immediately, analysts say.

But some say the BOJ could be forced to ease as early as this month if the U.S. Federal Reserve cuts interest rates and triggers an unwelcome yen spike against the dollar that hurts Japan’s exports.

The tankan showed big manufacturers base their earnings forecasts on the assumption the dollar/yen will average 109.35 during the current fiscal year ending in March 2020. The yen has strengthened above that level, now moving around 108.50.

The BOJ’s next policy meeting is July 29-30, when it will also conduct a quarterly review of its long-term economic and inflation forecasts.

Core consumer prices rose an annual 0.8% in May, slowing slightly from April, in a sign the economy may be losing momentum to fire up inflation to the BOJ’s elusive target.

Reporting by Leika Kihara; Editing by Sam Holmes