BoJ likely to stay course, fo­cus on weak prices

National Post (Latest Edition) - - FINANCIAL POST -

TOKYO • Ja­pan’s cen­tral bank will likely de­bate on Friday fac­tors that may be drag­ging on in­fla­tion, which has been dis­ap­point­ingly weak and could make talk of an exit from ul­tra-loose mone­tary pol­icy a dis­tant prospect.

At its two-day rate re­view end­ing on Friday, the Bank of Ja­pan is ex­pected to keep its in­ter­est rate tar­get at mi­nus 0.1 per cent and 10-year gov­ern­ment bond yields around zero per cent.

The de­lay in pulling out of cri­sis-era stim­u­lus would leave the Bank of Ja­pan with a lack of am­mu­ni­tion to fight an­other eco­nomic down­turn, even as its U.S. and Eu­ro­pean peers start re­stock­ing their tool-kit.

Sub­dued wage and price growth, de­spite a solid eco­nomic re­cov­ery, has been a nag­ging prob­lem not just for Ja­pan but the U.S. Fed­eral Re­serve and the Eu­ro­pean Cen­tral Bank, which met for rate re­views this week.

But fac­tors unique to Ja­pan, such as two decades of de­fla­tion that made firms and house­holds ac­cus­tomed to low wages, could keep the BOJ’s two-per-cent in­fla­tion tar­get elu­sive for years, say Jin Ken­zaki at NatWest Mar­kets Se­cu­ri­ties Ja­pan.

“In Ja­pan, peo­ple are used to many ser­vices be­ing free of charge. That’s why ser­vices prices don’t rise much. In­fla­tion ex­pec­ta­tions are also weak,” he said.

“We ex­pect the BoJ to cut its in­fla­tion fore­casts in July and con­cede its tar­get won’t be met un­til fis­cal 2020. If so, it’s hard for the BoJ to de­bate an exit from easy pol­icy.”

The cen­tral bank will stick to its view the econ­omy con­tin­ues to ex­pand mod­er­ately, shrug­ging off the firstquar­ter con­trac­tion as a soft patch, say sources fa­mil­iar with its think­ing.

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