Monday, July 23, 2012

Japan Could be back to 1% inflation in 2 years

The Bank of Japan could reach its 1 percent inflation goal in two years as brighter growth prospects spur prices, the central bank’s top economist indicated.

“Growth in prices will be closer to the 1 percent inflation goal at or after the end of fiscal 2013 unless the economy gets thrown off course,” Eiji Maeda, 50, the BOJ’s chief economist, said in an interview in Tokyo yesterday, referring to the year ending March 2014. “In the long term, there are signs that the tide is turning in price trends.”

The remarks signaling that the target could be met in the year starting April 2014 are the strongest yet from the central bank, which last month forecast prices would increase 0.7 percent in fiscal 2013. BOJ Governor Masaaki Shirakawa has pledged “powerful” monetary easing until the goal is in sight and has already added stimulus twice this year.

Companies have improved Japan’s growth outlook by targeting an aging population, which could spur demand and help lift prices, Maeda said. Higher labor costs in countries like China, Japan’s largest trading partner, have reduced pressure on Japanese firms to lower prices, which has also helped ease deflation in Japan, he said.
Gap Erased

The gap between supply and demand as a ratio to gross domestic product, which currently stands between 2 percent and 3 percent, will probably be erased over the next two years, he said. Consumer prices tend to rise 0.3 percentage point for every 1 percentage point improvement in the gap, Maeda estimates.

“It’s a very bullish estimate,” Yoshiki Shinke, chief economist at the Dai-Ichi Life Research Institute in Tokyo, said of BOJ’s 0.7 percent price outlook for the next fiscal year. “Chances are high that the BOJ will be forced to conduct additional easing as actual price growth will be lower than its forecasts.”

The BOJ unveiled the 1 percent target in February. Core consumer prices, which exclude fresh food and are the central bank’s preferred measure, rose 0.2 percent in March. Prices will rise 0.13 percent in fiscal 2013, according to 40 economists surveyed by the government affiliated Japan Center of Economic Research last month. Shirakawa’s five-year term ends in April.

The central bank has come under pressure this year to bolster its asset-purchase fund, the main policy tool with its key rate near zero, to sustain the nation’s recovery from last year’s record earthquake and weaken a currency that surged to a postwar high in October.

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