Bank of Japan sits tight as inflation concerns ebb

The Bank of Japan refrained from boosting unprecedented easing as accelerating inflation marks progress in its bid to stamp out 15 years of deflation in Asia’s second-biggest economy.

Governor Haruhiko Kuroda’s board stuck to its pledge to expand the monetary base by an annual 60 trillion to 70 trillion yen ($671 billion) yesterday after a two-day meeting in Tokyo, in line with the forecasts of all 36 economists surveyed. The BOJ maintained its forecast that core consumer prices will rise 1.9 percent in the year starting in April 2015, excluding the effect of sales-tax increases, and scrapped a reference to the economy facing “uncertainty.”

With the BOJ’s preferred inflation gauge at more than half of its 2 percent target pace, analysts from HSBC Holdings to Daiwa Securities have pushed back forecasts for when the central bank may add to easing. Kuroda’s policy makers may wait to assess trends in wages and the effects of the sales-tax increase in April before deciding on any extra stimulus.

“The Bank of Japan is saying it’s gaining confidence that it will achieve its target,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo and former central bank official. “The question now is whether they will act to support the recovery as the sales tax is raised.”

The yen depreciated 0.1 percent to 104.42 per dollar as of 3:11 p.m. in Tokyo, headed for a 0.9 percent gain this year. It slid 0.1 percent to 141.54 per euro after touching 140.33 on Jan. 20, the strongest since Dec. 6.

The Topix climbed 0.3 percent to 1,299.63 at the close of trading in Tokyo, after falling as much as 0.7 percent after the BOJ refrained from boosting unprecedented easing. The Nikkei 225 rose 0.2 percent to 15,820.96.

Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since 2008 and approaching the 2 percent target set a year ago. For the final quarter of 2013, analysts estimate inflation was 1.1 percent, according to a separate poll, nearly three times economists’ 0.4 percent forecast in a survey in April last year.

A BOJ statement released after the decision showed that the lowest board member inflation estimates increased for all three fiscal-year periods from projections made in October. The BOJ’s inflation forecasts are median estimates of the nine board members.

The statement said Japan’s economy has continued to recover moderately and cited front-loaded demand ahead of the April sales-tax bump. Overseas economies, mainly advanced ones, are starting to recover, the BOJ said.

In a statement following its Dec. 20 meeting, the BOJ said “there remains a high degree of uncertainty concerning Japan’s economy” - a reference that didn’t appear in today’s statement.

Nippon Paper Industries said this week it will increase the price of milk cartons by as much as 15 percent from April because of higher prices of imported paper and a weak yen.

The percentage of economists predicting an expansion of stimulus between April and June fell to 33 percent from 56 percent three months ago in the latest Bloomberg survey, which was conducted Jan. 10 to 15.

The number of analysts forecasting the central bank will add to its easing in July or later doubled to 48 percent from three months ago, the survey showed. The rest of the economists see additional loosening this quarter.

Economy Minister Akira Amari said Tuesday that there’s still a risk that the economy could fall back into the trend of declining prices that persisted for 15 years.

The strength of Japan’s economic recovery will be tested after the sales tax is increased to 8 percent in April from 5 percent, a move that economists forecast will trigger a 4.1 percent annualized contraction in the second quarter.

Kuroda said last month that risks from the higher levy will be “not so high,” while adding that the BOJ will adjust monetary policy without hesitation if necessary.

“The BOJ may act for political reasons after the sales tax is raised to show its stance to support the economy, given Abe’s efforts to end deflation,” Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo, said before today’s announcement.

Bloomberg