BOJ likely to stay course, focus on weak prices

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.