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 Instead, inflation is slowing, the economy is only slowing emerging
from recession and confidence among the economy's bedrock
manufacturers is slipping.
On Wednesday, the Bank of Japan (BOJ) sharply cut its inflation
forecast and the governor conceded it may take longer than expected
to hit 2 percent inflation, underlining the challenges of meeting
the target as oil prices continue to slump.
The yen rebounded against the dollar and Japanese equities fell
after the central bank held off on expanding its stimulus drive,
despite nearly halving its core consumer inflation forecast for the
year beginning in April to 1.0 percent.
Governor Haruhiko Kuroda defended the decision, saying that while
the lower cost of fuel may weigh on inflation short-term, it will
stimulate the economy and thus accelerate price growth.
"Looking at wage negotiations and inflation expectations,
fortunately there is no concern of Japan being beset by a
deflationary mindset again," Kuroda told a news conference.
"If Japan is making steady progress toward achieving 2 percent
inflation, there's no need to take additional steps."
As widely expected, the BOJ maintained its pledge to increase base
money at an annual pace of 80 trillion yen ($678 billion) by buying
government bonds and other securities.
The central bank instead extended by a year the deadline of several
loan schemes aimed at encouraging banks to boost lending, and
expanded the size of one of them.
Japan's economy slipped into recession in the third quarter of last
year and is only barely emerging from the doldrums as a hit from a
sales tax hike in April begins to ease.
Prime Minister Shinzo Abe was given a fresh mandate to put an end to
15 years of deflation with his stimulus policies, after his ruling
party's landslide victory in snap elections in December.
NO RUSH IN EASING
Less than three months ago, the BOJ expanded its "quantitative and
qualitative easing" (QQE) to prevent oil price falls and a
subsequent slowdown in price rises from damping down inflation
expectations.
Crude oil prices have nearly halved since then, keeping alive
expectations the BOJ will expand QQE again. Kuroda has repeatedly
said the bank will respond should inflation fail to reach 2 percent
"in a period centred on fiscal 2015."
In a review of its long-term estimates, the BOJ cut next fiscal
year's core consumer inflation forecast to 1.0 percent from 1.7
percent projected three months ago.
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But it roughly maintained its forecast that inflation will exceed 2
percent in fiscal 2016 and revised up its economic growth forecast
for next fiscal year, pointing to a rebound in exports and an
expected boost from government stimulus measures.
Kuroda admitted that Japan may not see inflation hit 2 percent until
fiscal 2016 depending on oil price moves. But he saw no need to
water down the BOJ's commitment, arguing that the bank never
promised to meet the target strictly in fiscal 2015.
"We've been saying (2 percent inflation) will likely be achieved in
a period centring fiscal 2015, so there's a possibility the timing
may stretch into fiscal 2016," he said.
Some market players took his remarks as a sign the BOJ won't ease
again any time soon.
"Even if inflation slows in the near term, the BOJ is not going to
react," said Hiroshi Shiraishi, senior economist at BNP Paribas
Securities. "The BOJ is prepared to look through near-term weakness
in inflation."
Others weren't so sure.
"Kuroda was saying that as long as falling oil prices do not cause
the return of a deflation mindset, leading to a decline in wages and
prices, the BOJ won't rush to additional easing," said Masamichi
Adachi, senior economist at JPMorgan Securities Japan.
"That said, I think there's a 60-percent chance of easing in July.
The BOJ's price outlook is way higher than ours."
Analysts polled by Reuters expect core consumer inflation to hit 0.6
percent next fiscal year and see the bank easing again as early as
in April.
The BOJ issues a semi-annual report with forecasts on the economy
and prices in April and October of each year. It reviews the
projections at rate reviews in January and July.
($1 = 117.9900 yen)
(Additional reporting by Stanley White, Tetsushi Kajimoto and Kaori
Kaneko; Editing by Eric Meijer)
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