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BOJ wages PR campaign to prepare markets for inflation slowdown
March 12, 2015 / 5:06 AM / 2 years ago

BOJ wages PR campaign to prepare markets for inflation slowdown

* BOJ sources say no need to rush on further monetary action
    * Board members stress need to look beyond oil effect
    * Markets still convinced bank will ease again this year
    * Consumption, not inflation, could be key to further action

    By Leika Kihara
    TOKYO, March 12 (Reuters) - Bank of Japan policymakers are
sending a concerted signal to investors that they see no need to
expand their already-massive monetary stimulus for a second time
in response to a slowdown in inflation driven by the fall in oil
prices.
    Six of the BOJ's nine board members, including Governor
Haruhiko Kuroda, went public in the past two weeks to push the
message that, while they expect inflation to grind to a halt or
even fall in coming months, they remain hopeful that a pick-up
in consumption will rekindle consumer prices down the line.
    While there was an element of coincidence in the cramming of
the events, the fact the fragmented board is speaking with a
single voice suggests a carefully-prepared campaign to correct
market misconceptions that a temporary slowdown in inflation
alone could trigger more monetary firepower.
    It also underscores reservations many in the BOJ feel about
expanding further an already radical stimulus programme, say
sources familiar with the bank's thinking.
    "If a positive economic cycle remains intact, there's no
need to rush into action," one source said, speaking on
condition of anonymity.
    There is still near-consensus in the market that the central
bank will ease again some time this year, as oil price falls
push inflation further away from its ambitious 2 percent target.
    "The BOJ may consider price declines as temporary and expect
inflation to accelerate from next year on. But I doubt if they
can sit still knowing that prices will be falling in the coming
months," said Hiroshi Watanabe, senior economist at SMBC Nikko
Securities, who predicts the BOJ will act in April.
    "Falling prices will push up real interest rates, shattering
the transmission channels of the BOJ's stimulus programme needed
to boost private consumption and capital expenditure."
    Some BOJ officials admit that they have only themselves to
blame. The central bank justified its surprise easing in October
as aimed at preventing oil price falls, and a subsequent
slowdown in prices, from hurting inflation expectations.
    That left markets with the impression the bank would jump on
the first signs of weakening inflation, regardless of what is
behind the slowdown, and so encouraged a preoccupation with
monthly inflation data.
    "The BOJ may have played up the oil factor too much. It is
now emphasising that what's important is a broader price trend,"
said another source familiar with the debate within the bank.
    
    SPENDING THE KEY?
    Indeed, officials who drafted the speech Governor Kuroda
delivered on Feb. 27 focused on explaining why the central bank
would not respond to oil price moves by themselves.
    Hiroshi Nakaso, one of Kuroda's two deputies who supported
last October's close-vote decision to ease policy, waded in on
Monday to say the key was not how oil prices affected headline
inflation, but how they influenced inflation expectations.
    Board members Takahide Kiuchi and Koji Ishida, who voted
against October's easing, also preached the benefits of the
lower cost of oil and stressed that the BOJ should not ease just
to hit the inflation target by a set time.
    When it first deployed its unprecedented programme of
aggressive asset purchases in April 2013, the BOJ said it aimed
to hit its inflation target and banish deflation in roughly two
years - a deadline it looks certain to miss by a wide margin.
    The bank agrees with the dominant market view that consumer
inflation will stagnate, and may even slide, until around
August, as the effect of the oil falls since last year persists.
    But it sat tight in January, even as continued oil price
falls forced it to sharply cut its core consumer inflation
forecast for the next fiscal year to 1.0 percent, and appears
determined to hang tough.
    Stripping out the effect of last April's sales tax hike,
annual core consumer inflation - which excludes fresh food but
includes oil costs - hit 0.2 percent in January and is set to
slow further in coming months.
    Some in the BOJ thus feel the bank may have to cut its
inflation forecast again at a semi-annual review on April 30.
    But it prefers to hold fire for now, hoping that inflation
will accelerate in the latter half of fiscal 2015 as oil prices
stabilise and companies boost wages to lure employees in a
tightening job market.
    A closer look at the BOJ officials' comments suggests that
the trigger for further easing may be less about oil price
moves, and more about the strength of private consumption.
    While BOJ officials are optimistic on the economic outlook
due to a pick-up in exports, some point to disappointingly weak
household spending as a soft spot in an economy barely crawling
out of recession.
    "There's uncertainty on how much capital expenditure and
private consumption will rise, even if corporate revenues and
real income improve," Sayuri Shirai, among the most pessimistic
board members on the economy, said on Tuesday.

 (Additional reporting by Tetsushi Kajimoto; Editing by Alex
Richardson)

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