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Kuroda's job of explaining Japan's inflation grows tougher
[TOKYO] Inflation has stalled less than halfway to the Bank of Japan's 2 per cent target, holding at 0.7 per cent after two months of declines.
That leaves BOJ Governor Haruhiko Kuroda with the job of once again explaining why inflation is so weak - and why he thinks that weakness is only temporary, after more than five years of the world's most radical monetary stimulus. It also leaves him out of sync with global peers on the road to policy normalisation.
"This fiscal year we're seeing quite a bit of weakness in prices so it's inevitable that the central bank will be under pressure to explain its monetary policy," said Masaki Kuwahara, senior economist at Nomura Securities Co.
Mr Kuroda has about five weeks before the BOJ policy board delivers its quarterly outlook, when he's widely expected to lower the forecasts for inflation. Last week the BOJ downgraded its assessment of current price gains, yet maintained its view that the momentum for longer term gains is firm.
This disconnect will take a lot more explaining at the next policy meeting ending on July 31.
The data released on Friday offered little hope of surging prices ahead. The BOJ's preferred gauge showed that prices for consumer products excluding fresh food rose 0.7 per cent in May, but higher energy prices accounted for the bulk of the rise. Prices excluding fresh food and energy rose a milder 0.3 per cent.
While a stronger yen is weighing on inflation by pushing down import costs, the fundamentals of Japan's economy also remain an obstacle to stronger price gains, said Takeshi Minami, chief economist at Norinchukin Research Institute.
"Retailers are trying hard not to raise prices because households are struggling," Mr Minami said.
Mr Kuroda has pointed to positive readings of broad supply and demand in the economy to justify his optimism. After last week's policy meeting, though, he did acknowledge that further analysis of Japan's economy and inflation was needed. He vowed to continue aggressive monetary stimulus.
Bloomberg Economics' Yuki Masujima supports the view that the present weakness won't last.
"The lull will soon pass, as a weaker yen lifts import prices and an economy running faster than potential continues to stoke underlying inflation pressures. The data are unlikely to sway the Bank of Japan, which last week downgraded its assessment of current inflation, but - importantly - stuck to its view that consumer price gains remain on an upward trend," according to Masujima.
Yet many economists have been pushing back their forecasts of when the BOJ might start normalising its monetary policy, which is widely thought to be both at the limits of its powers and producing diminishing returns. Some point to the BOJ's continued struggles as evidence of the limitations of monetary policy.
In April, the BOJ abandoned its targeted time frame for achieving its price goals rather than push it back for a seventh time.
"You can't say any longer that prices will rise according to the amount of money you print," Mr Minami said. "Prospects that further easing would push up prices are diminishing."
The fact that core inflation didn't fall again in May offered some relief after two months of declines but a quick reversal is unlikely, said Mari Iwashita, chief market economist at Daiwa Securities Co.
"Right now prices are being supported by oil-related energy products, and I expect these levels to continue until the start of autumn," she said.