TOKYO (Reuters) - The Bank of Japan will likely cut its rosy inflation forecast as early as this month, as slow wage growth and soft private consumption prevent prices from accelerating much this fiscal year, a former senior central bank executive said.
Any such downgrade of the BOJ’s 1.5 percent inflation target will make it difficult for the central bank to seek an early exit from its massive stimulus, said Kazuo Momma, a former BOJ official who oversaw its monetary policy and international affairs.
But there are also few reasons to ease policy as keeping interest rates ultra-low for too long could hurt household sentiment by pushing down the rate of returns on their savings, said Momma, an executive economist at Mizuho Research Institute.
“The BOJ’s price forecasts are too optimistic, so there’s a very high chance they will be revised down. This may happen at its next quarterly forecast review in April,” he said.
“It’s hard to raise interest rates when you’re cutting your inflation forecasts,” Momma told Reuters on Wednesday.
When stripping away the base effect of last year’s oil price falls, underlying trend inflation remains weak due to slow wage growth and sluggish household spending, he said.
Momma, who retains close contact with incumbent Japanese policymakers, said it is thus a near-certainty the BOJ will miss its 2 percent inflation target during the next fiscal year ending in March 2019.
He expects core consumer inflation to hover around 0.5 percent in the current fiscal year and accelerate only to around 1.0 percent the following year.
Under the current forecasts made in January, the BOJ expects core consumer inflation to hit 1.5 percent this fiscal year and 1.7 percent in fiscal 2018.
The BOJ will conduct a quarterly review of its economic and price forecasts at its next rate review on April 26-27.
Japan’s economy has shown signs of life in recent months, with exports and factory output benefiting from a recovery in global demand.
With inflation expected to accelerate later this year on a rebound in energy costs and rising import prices from a weak yen, a growing number of analysts now predict the BOJ’s next move would be to start scaling back its massive stimulus.
BOJ Governor Haruhiko Kuroda has said the central bank is nowhere near withdrawing stimulus with inflation still distant from its 2 percent target.
Core consumer prices rose 0.2 percent in February from a year earlier, marking the fastest annual pace in nearly two years.
But a separate consumer price index that excludes the effect of volatile fresh food and energy costs rose just 0.1 percent in February, suggesting that weak consumption was preventing companies from raising prices of non-energy items.
Additional reporting by Sumio Ito; Editing by Randy Fabi