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BOJ sees rift on outlook for price goal; keeps policy steady

A pedestrian holding an umbrella walks past the Bank of Japan headquarters in Tokyo August 8, 2013. REUTERS/Yuya Shino

By Leika Kihara

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda faced the biggest rift since embarking on his aggressive stimulus campaign in April, with three members of the board dissenting against the bank's rosy outlook for achieving its 2 percent inflation target.

In a twice-yearly outlook report released on Thursday, the BOJ revised up its economic growth forecast for next fiscal year and projected that Japan will make steady progress toward meeting the bank's 2 percent inflation goal in two years.

But two of the nine board members - Takahide Kiuchi and Takehiro Sato - repeated their dissent, made in April, against the two-year timeframe for achieving the price target, nodding to wide-held market views that Japan will need much longer to see prices rise to 2 percent.

Another board member, former IMF economist Sayuri Shirai, joined the dissenters in calling for more emphasis on downside risks to the economic outlook, underscoring a rift between those optimistic about the outlook and others who were more cautious.

While the disagreement may not immediately lead to a change in the BOJ's current policy framework, pessimists may be more keen to expand monetary stimulus if the economy faces trouble, some analysts say.

"I do not think disagreement will spread because growth and inflation will likely hold up for the next six months," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

"But it will become clear from the second half of next year that consumer prices are undershooting expectations. Shirai could be one of the first to call for more easing."

Kuroda put up a brave face, stressing that despite some challenges from slowing emerging Asian growth, Japan's economy will continue recovering and make steady progress toward achieving 2 percent inflation in two years.

"We won't suddenly see prices rise by 2 percent. But we'll see prices rises, not just for energy, but more broadly for various goods and services," he told a news conference.

"The global economy will gradually recover ahead and lead to a pick-up in exports," Kuroda said, though he did add that overseas growth was weaker than had been expected in April.

Earlier in the day, in a widely expected move, the BOJ maintained its intense monetary stimulus launched in April, under which it aims to double base money via asset purchases to help reflate the economy.


Japan's economy expanded for a third straight quarter in April-June as Prime Minister Shinzo Abe's stimulus policies boosted business sentiment and household spending.

But a slump in exports has cast doubt on the BOJ's view that global growth will pick up in time to offset an expected downturn in household spending when Japan raises its sales tax to 8 percent from 5 percent in April next year.

The BOJ revised up economic growth for the 2014 fiscal year to 1.5 percent from the current 1.3 percent, reflecting the expected boost from a 5 trillion yen (31.8 billion pounds) package planned by Abe to cushion the impact of the tax hike. It maintained its forecast for fiscal 2015 at 1.5 percent.

The central bank also kept its forecasts for core consumer inflation in fiscal 2014 and 2015 at 1.3 percent and 1.9 percent respectively, excluding the increase in the sales tax, signalling that Japan is on track to meet its price goal.

Analysts have criticised the BOJ's price projections as being too optimistic, given the modest pace of Japan's economic recovery and its 15-year history of suffering from deflation.

Thursday's BOJ forecasts showed at least two board members projected core consumer inflation of less than 1 percent for fiscal 2015, close to the 0.9 percent projection analysts made in a recent Reuters poll.

The board's inflation forecasts for that year ranged from 0.7 percent to 2.2 percent, underscoring the difference in views on how fast prices will rise from here.

"The BOJ is being too optimistic given there will be a sales tax hike and it could be forced to downgrade these numbers later," said Takuji Aida, chief economist at Societe Generale Securities.

"The BOJ may have to ease policy again in the second quarter of next year, around the time of the tax hike."

Wage earners' total cash earnings rose just 0.1 percent in the year to September, data showed on Thursday, reflecting the slow progress in achieving big increases in wages needed to end grinding deflation.

The BOJ has stood pat on monetary policy since April, and has stressed it won't ease again unless severe shocks to the economy threaten the achievement of its 2 percent inflation target.

(Additional reporting by Stanley White and Tetsushi Kajimoto; Editing by John Mair & Kim Coghill)