TOKYO (Reuters) - A majority of economists polled by Reuters believe the Bank of Japan will keep its long-term interest rate target unchanged this year, though 40 percent expect a hike, reflecting the mounting speculation as Japan’s economy continues to strengthen.
Forty economists, polled between Jan. 10-16, filled in a chart to indicate where they expect the BOJ’s long-term rate target would be each quarter up to the middle of 2019.
Around 40 percent predicted the BOJ would raise the target this year, but the rest either projected it would remain at zero in 2018 or left some future quarters blank, saying their outlook depended on who would be the new BOJ governor after Haruhiko Kuroda’s term ends in early April.
Kuroda is widely expected to be asked to stay on.
Many economists didn’t foresee the Bank of Japan unwinding its massive stimulus this year, but 16 did.
Two thought the central bank could begin cutting back in April, two said September, eight predicted October and four predicted December.
Seventeen expected the wind down would begin in 2019 or later.
Economists also largely thought the BOJ would continue - in its policy statements at least - to target an annual increase in its bond holdings of 80 trillion yen.
But, some economists said the target is a facade as the bank’s actual purchases have fallen to about half that pace.
In September 2016, the BOJ adopted the novel approach to guide 10-year yield around zero percent and keep its short-term interest rate at minus 0.1 percent.
“We expect the BOJ will gradually raise the 10-year JGB yield target to avoid a sudden change from the current policy towards an exit,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute. “The BOJ is also expected to drop its target of bond purchasing amount at the same time.”
He expects this could happen in the fourth quarter but predicts the BOJ will explain such moves not as “tightening” but a fine-tuning of its yield curve control policy.
Asked about when the government would declare an end to deflation, only one of 36 economists who responded saw it happening in the first half of this year, 12 expected it would be sometime during the second half, and eight predicted in the first six months in 2019.
The rest projected it would come after that — and eight analysts thought it wouldn’t happen in the foreseeable future.
Well over half the economists said such declaration would increase the likelihood that the government will press ahead with a planned - twice postponed - increase in the sales tax in October 2019.
“The government will probably have to make the final decision in Autumn 2018 whether to hike the tax and if it decides to raise, they will use an end of deflation as a factor,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Asked to choose up to three risks facing the Japanese economy this year, “North Korea” and “China’s economic outlook” tied for top risks. Next came “currency market movements” followed by the “Fed’s tightening impact” on financial and emerging markets.
(For other stories from the Reuters global long-term economic outlook polls package see)
Polling by Shaloo Shrivastava and Khushboo Mittal; Editing by Malcolm Foster and Simon Cameron-Moore