BOJ Struggles to Convince on 2% as Abenomics Shine Fades
By Masahiro Hidaka - Nov 5, 2013 1:30 AM CT
Half a year after Bank of Japan Governor Haruhiko Kuroda unleashed record monetary easing, economists see the bank failing to meet its inflation target, underscoring the case for stronger steps to revive the economy.
While the median estimate of BOJ board members released last week showed the bank expects consumer prices to rise 1.9 percent in the 2015 fiscal year -- in line with a 2-percent-in-two-years goal laid out in April -- just two of 34 analysts surveyed by Bloomberg News see the target met in that timeframe.
With the central bank seen standing pat on the pace of asset purchases until it can assess the impact of an April 2014 sales-tax bump, the onus is now on the government to sustain confidence in the Abenomics project. Prime Minister Shinzo Abe has yet to introduce legislation such as corporate-tax cuts that companies have advocated to boost Japan’s potential.
“Progress on the growth strategy has been slow,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “If the delays continue, foreign investors could lose confidence in Abenomics, and stocks could fall.”
Japan’s benchmark Topix index of stocks -- still the best performer among 24 developed markets this year in the aftermath of Kuroda’s easing and a tumble in the yen that made exporters more competitive -- trailed counterparts last month, signaling waning enthusiasm with Abenomics. The Topix advanced less than 0.1 percent, the worst among the group tracked by Bloomberg.
The Topix fell less than 0.1 percent in Tokyo today, a third day of decline as investors weighed corporate earnings and a stronger yen drove down exporters. The Japanese currency gained 0.2 percent to 98.45 per dollar at 4:00 p.m.
Fifteen of the economists surveyed said the lack of bolder steps on the growth strategy is undermining the central bank’s reflation campaign.
Bond investors’ inflation expectations haven’t changed much, said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. He cited a Quick survey carried out Oct. 29-31 that showed the average core consumer price inflation expectation of 140 respondents over the next 10 years edged down to 1.28 percent from 1.35 percent at the end of September.
“The BoJ’s target looks far away, at least if one asks bond investors,” Adachi said in a report today.
Growth slowed to an annualized 2.1 percent in the three months through September from 3.8 percent the prior quarter, Nomura Securities Co. estimated. BNP Paribas SA said the expansion likely slumped to 1.7 percent.
Japan is on a path to achieve 2 percent inflation, Kuroda said today in Osaka. The BOJ will adjust its policy as needed to achieve stable 2 percent price increases, he said.
Abe said the current extraordinary Diet session would be one for “getting things done,” reflecting a focus on pushing through legislation for his growth strategy -- the “third arrow” of his Abenomics project.
On the table are steps to encourage corporate restructuring to boost industrial competitiveness and the introduction of zones for deregulation in fields from medical treatment to urban development. The cabinet today approved the special zone bill, Economy Minister Akira Amari told reporters.
The yen’s about 12 percent slide against the dollar this year has induced nascent inflation by boosting import costs. Yet price gains remain distant from the BOJ’s target with core prices excluding fresh food, the central bank’s key gauge, rising 0.7 percent in September from a year earlier.
Regular wages excluding overtime and bonuses fell for a 16th straight month in September, showing the potential squeeze on households should inflation become embedded.
The 3-percentage point increase in the sales tax next year is set to cause an annualized 4 percent contraction in the second quarter even as Abe prepares 5 trillion yen ($50.7 billion) in stimulus to cushion the blow. A further two-point rise to 10 percent is scheduled for October 2015.
Japan needs fresh demand to offset the restrictive fiscal policy, and Abe comes up short when it comes to measures to spur business investment, said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. The scale and speed of efforts to remove international trade barriers, lower corporate taxes and deregulate are inadequate, he said.
“If the growth strategy continues to lag, the economy will turn down in April and I wouldn’t be surprised if stock prices started to fall heavily,” said Okubo, who formerly worked at Goldman Sachs Group Inc.
The BOJ in April said it would double the monetary base in the next two years by stepping up purchases of government bonds and other financial assets. The measure stood at 189.8 trillion at the end of October, up 45.8 percent from a year earlier, the BOJ said today. It forecast in April that the monetary base will increase to 270 trillion by the end of 2014.
Board members Takehiro Sato and Takahide Kiuchi said last week the median 1.9 percent price view, which strips out the effect of the sales-tax increases, was too optimistic. Sayuri Shirai, another BOJ policy maker, urged the central bank to more clearly reflect downside risks in its outlook report.
The central bank should be prepared to ease further in the case that growth plunges more than expected, Etsuro Honda, a top economic aide to Abe, said in an interview last week.
The BOJ is likely to step up stimulus in the April-June quarter to support the economy after the levy rise, according to 20 of the economists surveyed.
“The BOJ will need to fire another arrow aimed at devaluing the yen if the Abe administration is unwilling to risk a sharp economic slowdown,” Credit Suisse Group AG economists Hiromichi Shirakawa and Takashi Shiono wrote in a report.
Elsewhere in Asia, the HSBC China Services PMI rose to 52.6 in October from 52.4 in September, according to a report compiled by Markit, indicating a gain in services activity after official data last week showed a manufacturing gauge increasing to an 18-month high.
Premier Li Keqiang said China’s growth has entered a stage of medium-to-high speed, meaning about 7.5 percent a year or above 7 percent, according to the text of an Oct. 21 speech to the All-China Federation of Trade Unions, posted yesterday on its website. China needs growth of 7.2 percent to keep the urban registered jobless rate at about 4 percent, Li said.
In Australia, the central bank left its benchmark interest rate unchanged at a record low of 2.5 percent and said a weaker currency will be needed to achieve balanced growth.
Data in the U.K. today are forecast to show house prices rising in October at a faster pace than in the previous month.
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