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BOJ Struggles To Convince On 2% As Abenomics Shine Dims
Perspective | 07 November 2013

Half a year after Bank of Japan (BOJ) Governor Haruhiko Kuroda unleashed record monetary easing, economists see the bank failing to meet its inflation target, underscoring the case for stronger steps to revive the economy.

While the median estimate of BOJ board members showed the bank expects consumer prices to rise 1.9 percent in the 2015 fiscal year — in line with a 2 percent in two years goal laid out in April — just two of 34 analysts surveyed by Bloomberg News see the target met in that timeframe.

With the central bank seen standing pat on the pace of asset purchases until it can assess the impact of an April 2014 sales tax bump, the onus is now on the government to sustain confidence in the Abenomics project. Prime Minister Shinzo Abe has yet to introduce legislation such as corporate tax cuts that companies have advocated to boost Japan’s potential.

“Progress on the growth strategy has been slow,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo. “If the delays continue, foreign investors could lose confidence in Abenomics, and stocks could fall.”

Japan’s benchmark Topix index of stocks — still the best performer among 24 developed markets this year in the aftermath of Kuroda’s easing and a tumble in the yen that made exporters more competitive — trailed counterparts last month, signalling waning enthusiasm with Abenomics. The Topix advanced less than 0.1 percent, the worst among the group tracked by Bloomberg.

Slowing Growth
Fifteen of the economists surveyed said the lack of bolder steps on the growth strategy is undermining the central bank’s reflation campaign.

Growth slowed to an annualised 2.1 percent in the three months through September from 3.8 percent the prior quarter, Nomura Securities estimated. BNP Paribas said the expansion likely slumped to 1.7 percent.

Abe said the current extraordinary diet session would be one for “getting things done,” reflecting a focus on pushing through legislation for his growth strategy — the “third arrow” of his Abenomics project.

On the table are steps to encourage corporate restructuring to boost industrial competitiveness and the introduction of zones for deregulation in fields from medical treatment to urban development. The cabinet on 5 November approved the special zone bill, Economy Minister Akira Amari told reporters.

Tax Increase
The yen’s about 12 percent slide against the US dollar this year has induced nascent inflation by boosting import costs. Yet price gains remain distant from the BOJ’s target with core prices excluding fresh food, the central bank’s key gauge, rising 0.7 percent in September from a year earlier.

Regular wages excluding overtime and bonuses fell for a 16th straight month in September, showing the potential squeeze on households should inflation become embedded.

The three percentage point increase in the sales tax next year is set to cause an annualised 4 percent contraction in the second quarter even as Abe prepares 5 trillion yen (US$50.7 billion) in stimulus to cushion the blow. A further two percentage point rise to 10 percent is scheduled for October 2015.

Record Easing
Japan needs fresh demand to offset the restrictive fiscal policy, and Abe comes up short when it comes to measures to spur business investment, said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. The scale and speed of efforts to remove international trade barriers, lower corporate taxes and deregulate are inadequate, he said.

“If the growth strategy continues to lag, the economy will turn down in April and I would not be surprised if stock prices started to fall heavily,” said Okubo, who formerly worked at Goldman Sachs.

The BOJ in April said it would double the monetary base in the next two years by stepping up purchases of government bonds and other financial assets.

Board members Takehiro Sato and Takahide Kiuchi said the median 1.9 percent price view, which strips out the effect of the sales tax increases, was too optimistic. Sayuri Shirai, another BOJ policy maker, urged the central bank to more clearly reflect downside risks in its outlook report.

The central bank should be prepared to ease further in the case that growth plunges more than expected, Etsuro Honda, a top economic aide to Abe, said in an interview.

The BOJ is likely to step up stimulus in the April to June quarter to support the economy after the levy rise, according to 20 of the economists surveyed.

“The BOJ will need to fire another arrow aimed at devaluing the yen if the Abe administration is unwilling to risk a sharp economic slowdown,” Credit Suisse economists Hiromichi Shirakawa and Takashi Shiono wrote in a report.


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