Wednesday, April 2, 2014

Japan firms doubt BOJ price targets, new stimulus seen

(Reuters) - Corporate Japan expects the consumer price index to be just 1.5 percent higher in a year from now, a Bank of Japan tankan survey found on Wednesday -- a sign of how difficult the central bank could find meeting its 2 percent inflation goal by the April 2015 target date.

The survey outcome overlays Tuesday's tankan findings that Japan's fragile business sentiment barely improved in the three months ending March, and the corporate outlook is now considerably weaker than when Japan raised its sales tax in 1997, the last hike before Tuesday's increase to 8 percent from 5 percent.

The findings stem from a BOJ decision to poll companies' inflation expectations, starting with its March tankan survey, to give central bankers more information to guide monetary policy.

Besides a forecast for just 1.5 percent consumer price inflation in a year, the survey also showed that firms expect consumer prices to be rising by a modest 1.7 percent three years and also five years from now, suggesting the BOJ's two-year plan for guiding consumer prices to 2 percent is overly ambitious and may require additional measures.

The BOJ has kept monetary policy steady since deploying an intense burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in two years, but speculation could increase that the BOJ will have to ease policy further.

"It is a little painful for the BOJ that the numbers did not come closer to 2 percent," said Shuji Tonouchi, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"The BOJ may have to be more flexible with the time element of its price target. We expect the BOJ to ease policy again in the second half of the year."

HOUSEHOLD EXPECTATIONS UNCHANGED

A separate BOJ survey released on Wednesday showed that Japanese households also aren't fully convinced that inflation will accelerate in coming years.

Of the households polled by the central bank, 69.3 percent said they felt prices have risen compared with a year ago, up from 67 percent in the previous survey three months ago.

But the ratio of households who expect prices to rise a year from now fell to 79.9 percent from 80.9 percent, with 15.6 percent saying they expect prices to remain largely unchanged, according to the survey conducted from February 6 to March 4.

The new data on corporate price expectations showed that consumer prices are expected to rise gradually, which could be discouraging for some central bankers.

The survey also showed that companies expect the prices they will charge for their goods will be rising an average 1.1 percent one year from now, 1.8 percent three years from now, and 2.1 percent five years from now.

The survey showed that large manufacturers expect the prices for their goods to be only 0.2 percent higher a year from now, while small manufacturers expect these prices to be 1.2 percent higher one year from now.

The difference is because many large manufacturers expect prices overseas will remain flat, while small manufacturers' expectations are based more on the outlook for domestic demand, fixed-income strategist Tonouchi said.

Growing expectations that the BOJ will ease policy further, in addition to bullish data on the U.S. manufacturing sector, helped lift Japanese shares .N225 to a three-week high on Wednesday.

"The big decline in the outlook in yesterday's tankan and the fact that inflation expectations did not reach the BOJ's price target support heightening expectations for more easing," said Kenji Kobata, president at Ace Research Institute.

"BOJ Governor Haruhiko Kuroda could try to surprise markets by easing in May." Growth in the world's third-largest economy slowed in the final quarter of last year as the effect of the government's reflationary policies began to fade.

Analysts expect the economy to contract in April-June due to a pullback in consumption after the tax hike, before returning to moderate growth in following quarters.

Kuroda has played down the need for additional quantitative easing, but many economists forecast the central bank will ease policy later this year as it will be difficult to reach the BOJ's price stability target in fiscal 2015.

A Reuters poll showed analysts expect the BOJ to ease again by July, despite reassurances by the bank the economy can withstand the tax hike without further stimulus.

reuters.com

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