Further BoJ rate cut expected

Economists downgrade fiscal 2017 CPI forecast

TOKYO: The Bank of Japan is expected to cut its negative interest rates further to -0.2% at or before its July meeting, according to a Reuters poll, as consumer price inflation remains stuck far below the central bank’s target and the economy stagnates.

Economists also downgraded their forecasts for core consumer prices for the fiscal year starting April and the following year as weak domestic demand and falling energy costs keep prices low.

“Downside risks to the economy have become apparent,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“In addition to oil price falls, when the BoJ judges the disappearing effects from yen’s weakness hampers price recovery, it will likely ease again,” he said.

Thirteen of 14 analysts project that the BoJ will ease policy further at or before the July meeting, the poll taken between Feb 26 and March 3 showed.

Three respondents each chose the March, April and June meetings for when the central bank would ease policy, four nominated the July meeting, and one opted for the Oct 31 to Nov 1 review.

The BoJ surprised markets in January by implementing a 0.1% charge on a portion of current account deposits that financial institutions have at the central bank.

But the move, similar to a European Central Bank programme, has so far done little to push the Japanese yen lower. It rallied 7% against the dollar the week after the policy announcement.

A Reuters poll on Thursday found the yen was not expected to weaken to 120 to the dollar, the level it was trading at through most of 2015, until towards the end of this year.

In the absence of a weaker yen, which is helpful for Japan’s export economy and makes imports costlier, economists cut their forecasts for the core consumer price index in the latest poll.

The headline inflation measure, which includes oil products but excludes fresh food, is predicted to reach 0.4% in the fiscal year from April, down from the 0.6% projected last month.

In fiscal 2017 core CPI is seen rising 1% excluding the impact from a planned sales tax hike in April that year, down from 1.2% forecast in February.

“Consumer spending has been weaker than previously expected, which will make it difficult for corporations to raise prices,” said Takumi Tsunoda, senior economist at Shinkin Central Bank. “The BoJ’s own measure of CPI is also showing signs of slowing down.”

The central bank’s new consumer price index, which excludes the effects of volatile energy and fresh food costs, rose 1.1% in January versus 1.3% in December.

The world’s third-largest economy was expected to grow 1% over for the next fiscal year, the poll showed, down from 1.2% projected last month.

Prime Minister Shinzo Abe will pull together a new advisory panel to debate the need for a supplementary budget for the next fiscal year. The panel is expected to meet about five times before the Group of Seven summit in late May.

But many economists surveyed said the government should not compile an additional budget soon, and predicted it would not do so.

“The government compiles extra budgets around the year-end every year, so the impact is diminishing,” said Minami of Norinchukin Research Institute.

Speculation is increasing over whether the government could delay the planned 2017 sales tax hike because the economy may be too fragile to absorb its impact.

A majority of respondents said the tax hike should not be postponed because of the government’s heavy debt burden. The respondents were, however, split on whether the government would delay the tax hike or not.