Central Banks

Did the BOJ just buy itself more time?

Kevin Winter | Getty Images

The Bank of Japan's (BOJ) surprise decision to push back the date for achieving its two percent inflation target may signal the central bank is trying to buy time before admitting it needs to easing monetary policy again.

"It is far from clear that Quantitative and Qualitative Easing (QQE) has lifted inflation expectations among households and firms. In fact, expectations of future price rises may fall sharply in coming months as observed inflation may turn negative," Marcel Thieliant, an economist at Capital Economics, said in a note Thursday. "We therefore remain convinced that more monetary easing will be needed before too long."

Other analysts are also pointing to signs that inflation isn't cooperating with the BOJ's forecasts, but the central bank's unexpected move Thursday to give up its self-imposed goal of achieving its inflation target this year and instead target fiscal 2016 has spurred many to move back their forecasts for the next round of monetary easing.

Data released on Friday showed that inflation has crept up in March, albeit by just 0.2 percent on-year after adjusting for the three percentage-point consumption tax hike in April 2014.

The BOJ kept intact its 80 trillion yen ($668.20 billion) annual asset purchase, or QQE, program at its monetary policy meeting Thursday.

"The latest change in guidance and Governor [Haruhiko] Kuroda's press conference remarks suggest the board will instead adopt a wait-and-see stance in the near term," HSBC Japan economist Izumi Duvalier said in a note Friday. She has pushed back her forecast date for additional easing to the end of October 2015 from the end of the second quarter of 2015.

Others moved their forecasts back even further, with JP Morgan chief Japan economist Masaaki Kanno saying he now expects more easing in January or April 2016, compared with a previous forecast of July or October 2015.

Optimistic assumptions

One quandary for the BOJ is that its economic assumptions -- that rising wages would push up spending and eventually prices -- have been thwarted by the actual data.

A reality check on BOJ's inflation target

Even though March's unemployment rate fell by 0.1 percentage point from the previous month, workers' total cash earnings grew by just 0.1 percent.

"A steady decline in the unemployment rate has not invited any meaningful upward pressures on wages so far," Credit Suisse chief Japan economist Hiromichi Shirakawa said in a note on Friday.

And with wages barely rising, Japanese households have continued to reduce spending too.

For the first quarter of 2015, real household spending excluding housing was flat on a quarterly basis and retail sales contracted by 2.1 percent, according to Credit Suisse.

Is easing getting tough?

The BOJ has several reasons for wanting to push back any additional easing steps.

"Trying to achieve the 2 percent inflation target in the year oil price has halved would force the central bank to take measures that may be too inflationary," Japan Macro Advisors (JMA) said in a note Thursday. "There is also a time limit to how long the BOJ could continue its quantitative easing."

The BOJ owns around 27 percent of the Japan government bond (JGB) market and at its current rate, it will own around 50 percent by the end of 2018, JMA noted.

Although there may no theoretical limit to how high the BOJ's share of the JGB market can rise, "50 percent seems like the very edge where central bank could [still] justify its bond purchase operation," JMA said.

Backed into a corner

With underlying trends working against the BOJ's assumptions, some central bank watchers are already waiting for the next forecast downgrades.

"The BOJ has repeatedly highlighted crude oil as a sole factor [in anemic inflation], but underlying prices excluding oil are soft nonetheless," Goldman Sachs chief economist Naohiko Baba said in a note on Friday.

"It is only a matter of time before it will need to further revise down its price outlook."

Goldman also pushed back on Friday its forecast for additional easing from July, to the end of October.