BOJ to maintain upbeat price forecasts in a move signaling decreasing deflation

Japan’s central bank is set to maintain upbeat price forecasts next week and paint a slightly better picture of the economy than it did three months ago, signaling its conviction the country is making slow but steady progress in eradicating deflation.

Bank of Japan (BOJ) Governor Haruhiko Kuroda will likely remind markets at his postmeeting briefing that an exit from ultra-easy policy will be some time away, with inflation still distant from its 2 percent target.

But analysts say Kuroda may convince investors, who have become sensitive to even subtle signs the BOJ may follow the footsteps of its US and European counterparts in dialing back crisis-mode stimulus.

With no change to monetary policy expected at next week’s rate review, markets will focus on Kuroda’s comments and the BOJ’s new quarterly forecasts for clues on how quickly the central bank could start whittling down monetary support.

“BOJ policymakers have become more vocal on the cost of prolonged easing, probably to see how markets react. They can afford to do this as the economy is doing well,” said Yoshiki Shinke, chief economist at Daiichi Life Research Institute.

“The key would be yen moves. The BOJ could start normalizing policy this year if they are convinced such a move won’t trigger an unwelcome yen spike,” he said.

The BOJ got a taste of the communication challenge when a slight cut in its bond buying pushed up global bond yields, and Kuroda’s positive remarks on the economy drove the yen to a four-month high.

At the two-day meeting ending on Tuesday, the BOJ was seen maintaining a pledge to guide short-term interest rates at minus 0.1 percent.