World Economy

BoJ Fails to Ease Inflation Worries

BoJ Fails to Ease Inflation WorriesBoJ Fails to Ease Inflation Worries

The Bank of Japan’s head, Haruhiko Kuroda, added another instance to his record of wrong-footing financial markets this week.

Confronted with a rising yen and tumbling inflation, the central bank governor had little choice but to shore up the credibility of the Bank of Japan with even looser monetary policy. But in the end the BoJ kept its stance unchanged. Markets reacted swiftly after the decision on April 28 -- the yen jumped and the Nikkei 225 stock market index slumped, The Economist reported.

Since introducing an interest rate of -0.1% on excess bank reserves in late January, Kuroda has been hauled before parliament no fewer than 32 times to explain himself. Perhaps that has left him gun shy. Or perhaps the BoJ’s inaction is a hint to Shinzo Abe, the prime minister, that monetary policy should bear less of the burden of dragging Japan’s economy out of the slough of low inflation and growth.

Many economists reckon, nonetheless, that the BoJ will have little choice but to ease again soon. Abe’s policies have failed to produce much growth or inflation, partly due to a falling oil price and China’s slowdown. GDP contracted by an annualized 1.1% in the last quarter of 2015 and is expected to continue fluctuating around zero in the first half of 2016.

Some hopeful data emerged before the BoJ’s monetary policy meeting, notably that industrial production rose month on month in March by 3.6%, the biggest leap in nearly five years. But growth in the second quarter will probably suffer from recent earthquakes in Kumamoto prefecture, which disrupted industrial supply chains.

  Caught in Deflation

Worse, Japan is once again mired in deflation. Core CPI, which excludes fresh food, fell by 0.3% in March year on year, the biggest drop since the BoJ launched its program of easing three years ago.

Meanwhile the BoJ’s preferred measure, which strips out fresh food and energy, rose by 1.1%. Yet the drops in the headline measures have dented households’ and firms’ expectations of inflation. The BoJ once again cut its forecasts for growth and price rises.

What especially worries policymakers is that the yen has risen by nearly a tenth against the dollar since late January, reversing a long decline as the BoJ embraced quantitative easing. If anything, Japan’s trade and current account surplus signal further currency strength over the rest of the year, reinforced by the Federal Reserve’s failure to signal another imminent rate rise at its meeting this week.

All in all, the power of the BoJ to overcome structural imbalances in Japan’s economy seems to be diminishing. Large firms have continued to add to their hoards of cash. They now hold close to ¥250 trillion ($2.2 trillion) in cash, a massive 50% of GDP.