BOJ head’s inflation forecast is a risky gamble
IT’S TOO bad the central banking profession has no Hippocratic oath. If it did, Haruhiko Kuroda would’ve known better than to harm Japan’s reflation regimen by saying prices were about to “accelerate considerably”. Everyone knows the Bank of Japan (BOJ) governor is gunning for 2 percent inflation. Now they also know how delusional his team is becoming as that goal fades further into the future. Kuroda’s comment cuts both ways: If he’s right that consumer prices are about to surge, then he has just scared Japan’s 127 million people into spending less. And if he’s wrong, the BOJ has just burned the last shreds of its credibility with world markets.
For now, the latter seems more likely. Markets called Kuroda’s bluff as the yen and Japanese government bond yields barely budged. Had traders believed Kuroda’s warning, 10-year yields wouldn’t have fallen to 0.4 percent on Wednesday, compared with 2.32 percent in the US. That explains why, with a couple of regrettable words at a Bangkok conference on Tuesday, Kuroda undermined more than two years of unprecedented monetary stimulus.
Unless the BOJ has compelling data showing that inflation expectations are moving its way, this is a risky gambit. The folks at Pacific Investment Management Company (Pimco), for example, think more monetary easing is on the table as headwinds mount. China’s slowdown alone might be reason for the BOJ to stick to an easing stance, said Pimco’s Tomoya Masanao. Risks abound for a deflationary shock from global equities, currencies or oil prices.
Gold, meanwhile, may soon sink below $1 000 (R12 608) an ounce for the first time since 2009, according to Goldman Sachs analyst Jeffrey Currie. That’s hardly a sign that markets sense any of the world’s three biggest economies (Japan is third) are on the verge of an inflation surge.
Nor do Japan’s mainstream price gauges fit Kuroda’s narrative, which explains why his team is eyeing a new measure. It’s highlighting charts showing that inflation advanced 0.7 percent in May, well ahead of the official 0.1 percent. To get there, staffers stripped out fresh food and energy (the monthly consumer price index excludes only food). But fudging data won’t change perceptions. Only increased confidence in Japan’s future can do that.
Kuroda might consider talking less and doing more to achieve that goal. One suggestion: Focus on qualitative, rather than quantitative, easing. The quantity of money has surged since April 2013, when Kuroda pushed the BOJ into uncharted territory. He expanded the bond-buying campaign in October 2014, when policymakers pledged to purchase about $700 billion of public debt each year. The BOJ also quadrupled purchases of Japanese government bonds maturing in 25 years or more.
Running out of road