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Bank of Japan Sticks With Campaign of Record Monetary Easing - (Bloomberg)

Posted by Chris Advincula on Oct 31, 2013 4:51:00 AM
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The Bank of Japan maintained its commitment to unprecedented monetary easing and reiterated its forecast that inflation will almost match its 2 percent target in the year starting April 2015.

Governor Haruhiko Kuroda’s board stuck with a pledge to expand the monetary base by 60 trillion to 70 trillion yen ($711 billion) a year, in a decision released in Tokyo today. The median forecast of the BOJ’s board is for average 1.9 percent inflation in the 2015 fiscal year, stripping out the effect of increases in the sales tax, a separate statement showed.

While weakness in the yen and higher energy prices have helped to counter deflation, last month’s 0.7 percent increase in the BOJ’s key price gauge showed that a goal of 2 percent inflation remains distant. After jolting the economy with fiscal and monetary stimulus, Prime Minister Shinzo Abe is pressing companies for the wage gains needed to drive a sustained recovery.

“The BOJ’s outlook for prices is excessively high,” said Daiju Aoki, senior economist for Japan at UBS AG in Tokyo. “The central bank will probably have to adjust its optimistic view on prices next fiscal year. The next easing is likely to come after the sales-tax hike in April.”

Inflation Target

Asian stocks fell, after the Federal Reserve fueled bets it may start paring stimulus sooner than previously forecast. The regional benchmark MSCI Asia Pacific Index was down 0.8 percent at 3:43 p.m. in Tokyo, while the Topix index fell 0.9 percent today. The yen traded 0.2 percent higher, at 98.35 per dollar.

Japan is on track to see 2 percent inflation, with the economy projected to grow at a faster pace than its potential over the forecast period through March 2016, the BOJ said. The central bank said attention should be paid to the impact of the sales-tax increase and that it will make policy adjustments as needed.

The BOJ projected core consumer prices, which exclude fresh food, will increase 1.3 percent in the year from April, according to the median estimate of the board members. The economy will expand 1.5 percent next fiscal year and the following year, according to the projections in the semi-annual outlook.

Tax Impact

The BOJ is likely to step up its easing between April and June next year to support the economy after an increase in the nation’s sales tax, according to 20 of 34 economists surveyed by Bloomberg News.

The economy is forecast to contract in the three months after the sales tax is raised in April before returning to growth, according to a separate survey by Bloomberg.

A survey of purchasing managers released today showed manufacturers this month at their most confident in more than three years, after data yesterday showed domestic demand is boosting production.

While consumer prices have started to rise, household incomes continue to fall, squeezing consumers, even as Abe urges companies to raise workers’ wages as part of his bid to reflate the world’s third-largest economy.

Regular wages excluding overtime and bonuses dropped 0.3 percent in September from a year earlier, marking a 16th straight month of decline, according to labor ministry data released today. Total cash earnings rose 0.1 percent.

’Virtuous Circle’

“The key for the success of Abenomics is whether companies will raise wages,” said Norio Miyagawa, a senior economist at Mizuho Securities Research and Consulting Co. in Tokyo. “Companies still aren’t confident enough that growth will be sustained and will probably hesitate to raise wages, especially base salaries, for the time being.”

The central bank should be prepared to step in if needed after the sales tax is raised, Etsuro Honda, one of Abe’s top economic aides, said yesterday in an interview at the Prime Minister’s office in Tokyo.

“The Bank of Japan will do more aggressive easing in the case that real GDP plunges deeper than we expected after April,” Honda said. Any decision on further central bank stimulus would probably have to wait until after growth data comes out for the April-June period, he said.

Abe said in a speech this month at the start of a special parliamentary session that he aimed to boost employment and raise wages, creating a “virtuous circle” that spurs consumption and investment. The government began holding meetings with business and union leaders in September as part of a campaign to persuade businesses to raise wages.

Wage Offensive

Trade union negotiations with management on salaries in talks known as “shunto,” or the spring wage offensive -- around March next year -- will be key for pay increases.

The negotiations “will be one clear point at which there is a chance to either show that something new is happening or raise further doubts,” Jerry Schiff, the International Monetary Fund’s mission chief for Japan, said in an interview this week in Tokyo. “It’ll be important to get wages to begin to rise soon.”

The Japanese Trade Union Confederation, or Rengo, plans to demand pay increases of more than 1 percent in next spring’s labor talks -- a move welcomed by Economy Minister Akira Amari.

Toyota Motor Corp. President Akio Toyoda said Oct. 17 that Toyota workers need better benefits and wages, while Hiromasa Yonekura, head of the Keidanren business lobby group, said the same day that an improvement in corporate earnings will lead to an increase in capital spending and wages. 

 

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