Central bank upbeat about economy's 'moderate' recovery
Prime Minister Shinzo Abe has made the fight against deflation - the damaging decline in prices, profits and wages that has dogged Japan for most of the past 15 years - a central tenet of his economic policy. On his urging, the central bank committed to a target of 2 per cent annual inflation, considered healthy by many economists. On Friday, the central bank, the Bank of Japan, under its new governor, Haruhiko Kuroda, put a date on that target: 2015 or early 2016.
"Various indicators are showing signs that inflation expectations are heightening as a trend," Mr Kuroda said on Friday, Reuters reported. "Business and household sentiment is improving."
"Japan's economy has stopped weakening and has shown some signs of picking up," the Bank of Japan said in its economic report. "Looking ahead, it is expected to return to a moderate recovery path around mid-2013." The bank cited a likely improvement in domestic demand as the increased money supply and other economic measures announced take effect.
The central bank also raised its growth forecasts for this year and the next. The bank said the economy would gradually accelerate to 1.6 per cent growth in the fiscal year that ends in March 2016.
The optimistic projections were made as worse than expected economic data for March was released by the statistics bureau. Core consumer prices, which exclude food, fell 0.5 per cent compared with March 2012, the fifth consecutive month of year-on-year declines.
The news added to the doubts of some economists that Japan's grinding deflationary era would end soon. The figure "offered another reminder that deflationary pressures remain strong," Izumi Devalier, Japan economist at HSBC, wrote in a research note. Although a gradual escape from deflation is expected, thanks in part to higher energy prices, she said the inflation rate was unlikely to match what she called the Bank of Japan's "optimistic projections".
Shortly after Mr Kuroda took the top job, the central bank committed to inflating the economy by aggressively doubling its holdings of government bonds in two years.
Frequently Asked Questions about this Article…
The Bank of Japan, under Governor Haruhiko Kuroda, has committed to a 2% annual inflation target and has put a date on reaching it of 2015 or early 2016.
Yes. The article notes that deflation remains firmly entrenched: core consumer prices (excluding food) fell 0.5% year‑on‑year in March versus March 2012, marking the fifth consecutive month of year‑on‑year declines.
The central bank has moved to aggressively expand liquidity, including a commitment to double its holdings of government bonds over two years and increasing money supply, alongside other economic measures intended to lift domestic demand and inflation expectations.
The Bank of Japan said the economy has stopped weakening and expects it to return to a moderate recovery path around mid‑2013, with growth gradually accelerating toward about 1.6% in the fiscal year ending March 2016.
Not all economists are convinced. The article quotes Izumi Devalier of HSBC expressing caution, saying deflationary pressures remain strong and that while a gradual escape from deflation is possible, inflation may not match the BOJ’s optimistic projections.
Everyday investors should track core consumer price data, monthly inflation reports, BOJ policy statements (including bond‑buying programs), business and household sentiment indicators, and official growth forecasts to gauge the strength and timing of any recovery.
According to the article, the BOJ’s aggressive expansion of bond holdings and increased money supply are intended to boost domestic demand and lift inflation expectations. Investors should watch for potential impacts on bond yields, liquidity conditions and market sentiment, although the article notes there are no quick fixes and results may take time.
Worse‑than‑expected March economic data showed core consumer prices fell 0.5% year‑on‑year, which highlighted that deflationary pressures remain strong and added to doubts among some economists about how quickly deflation will end.
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