Many officials prefer to hold off on expanding stimulus programme

Tokyo, October 26

Bank of Japan (BoJ) policymakers meet for a crucial rate review on Friday as growing signs of recession and slumping oil prices challenge their scenario that the world’s third-largest economy is on track to hit an ambitious two per cent inflation target.

While the central bank is set to cut its rosy price forecasts in a semi-annual report due out Friday, many BoJ officials prefer to hold off on expanding an already massive stimulus programme that has had limited success in accelerating inflation since being deployed two-and-half years ago.

They are clinging to hopes that Japan’s economy will emerge from the doldrums next year as global demand for its exports pick up and accelerate inflation toward the BoJ’s target.

BoJ Governor Haruhiko Kuroda has signalled that no immediate easing was forthcoming as a tightening labour market is seen pushing up wages and boosting consumption.

“The BoJ is likely to maintain its forecast of a moderate economic recovery,” said Mari Iwashita, chief market economist at SMBC Friend Securities.

“If so, the bank will stand pat on policy even if it cuts its economic and price forecasts,” she said.

Some analysts, however, bet that growing signs of weakness in the economy may nudge the central bank into action.

A host of indicators due out this week, including September output data, may swing the debate in favour of action if they heighten concern over Japan’s recovery prospects, they say.

Economists are divided on whether the BoJ will act on Friday with six of the 13 predicting it will add to its stimulus.

With Japan flirting with recession due to weak exports, the BoJ’s twice-yearly report will likely cut its growth and price forecasts for the fiscal year that began in April.

But it is seen making only minor cuts to its inflation forecast of 1.9 per cent for next fiscal year, sources say, possibly taming market expectations of additional stimulus.

A lack of government pressure for more monetary stimulus may also mean the BoJ will save its limited policy tools for now.

“There’s a limit to what monetary policy can do to boost prices,” Finance Minister Taro Aso said on Friday, signalling that no additional monetary easing was needed for now.

With inflation having ground to a halt, the BoJ is likely to acknowledge that the timing for hitting its price goal will be delayed by several months from the current projection of around September next year.

But any such delay won’t immediately trigger monetary easing because it is mostly due to renewed declines in oil prices, not weakness in the economy, BoJ officials say.

A series of data due this week may hold the key to the BoJ’s policy decision.

Japan’s economy contracted in April to June and may shrink again in July to September on weak exports. Many analysts say growth may not rebound much in the current quarter if the pain from China’s slowdown persists.

Data due on Thursday will show factory output fell for the third straight month in September, while Friday’s inflation and consumption data will underscore the fragile state of Japan’s recovery, according to analysts polled by Reuters.

“There’s no doubt the economy is in pretty bad shape, so it would make sense for the BoJ to ease on Friday,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“The economy is lacking a driver of growth, so it’s hard for the BoJ to argue that a broad uptrend in prices remains intact.”