Japan’s consumer prices fell for the seventh time in eight months, underscoring the risk that the central bank may struggle to reach a 2 percent inflation target unless it implements new easing measures earlier than planned.
Consumer prices excluding fresh food fell 0.2 percent last month from a year earlier, the government said in Tokyo yesterday, matching the median estimate of 23 economists surveyed by Bloomberg News.
Bank of Japan (BOJ) Governor Masaaki Shirakawa said yesterday that meeting the target would not be easy and that central banks need to be alert to financial bubbles.
Deputy Economy Minister Yasutoshi Nishimura said in an interview on Thursday that reaching the inflation target announced this week will be difficult without more easing, as he endorsed further weakening of the yen.
The minutes of a central bank meeting held last month that were released yesterday show that some members were in favor of making asset purchases in the first half of this year to support an economy that contracted in the second and third quarters of last year.
“There is no doubt that the 2 percent target is too high,” Tokyo-based chief economist at Meiji Yasuda Life Insurance Co Yuichi Kodama said. “The BOJ will have to implement much looser measures.”
The central bank said this week that it will shift to US Federal Reserve-style open-ended asset purchases from January next year and target the achievement of 2 percent inflation “at the earliest possible time.”
The central bank’s forecasts this week showed inflation at 0.9 percent in the year starting April next year.
Shirakawa said that the nation faces the risk of higher bond yields if the central bank buys “more and more” debt.
“If we change policy to buy more and more bonds to mechanically achieve 2 percent inflation, people might think we are financing government spending,” Shirakawa told reporters yesterday. “Long-term interest rates would rise, and the effects of monetary easing would be lost.”
He also said that central banks have a responsibility to prevent bubbles and keep the economy stable.
Investors are betting they have at least 30 years until the bank’s efforts to reach its target pose a threat to their bond holdings. Japan’s 30-year government bond yield was at 1.995 percent, while the benchmark 10-year yield fell to 0.72 percent, the lowest since Dec. 14 last year.
Japanese Prime Minister Shinzo Abe, who said on Thursday that he expects bold easing from the central bank, takes his plan to pull the economy out of recession to a divided parliament next week, seeking to win support for reshaping the central bank after Shirakawa’s term ends in April.
The Japanese Diet opens on Monday with the Liberal Democratic Party (LDP) back in power after last month’s landslide win in lower house elections, with Abe under pressure to fulfill his pledge to revive the world’s third-largest economy.
Goldman Sachs Group Inc said this week it sees inflation at 0.5 percent at the end of next fiscal year and said the Bank of Japan’s inflation target remains “far off.” The bank raised its Japan growth forecast for the year beginning in April to 2 percent from 1.2 percent.
Abe says he wants a central bank chief who supports using monetary stimulus to revive growth. His nominees for governor must be approved by the opposition-controlled upper house, which will hold elections in July.