Analysis: Recession risk forces BOJ to row back on inflation goal
18/02/2020 08:08
* Rising prices not particularly welcome news for BOJ
* BOJ no longer inclined to push towards 2% inflation goal
* Price hikes lack demand impulse, a perennial Japan problem
* Dwindling tool-kit, weak recovery keep BOJ's eyes on
growth
(Adds Reuters poll on wage growth)
By Leika Kihara and Kaori Kaneko
TOKYO, Feb 18 (Reuters) - The widening economic fallout from
the coronavirus outbreak and soft consumption are forcing the
Bank of Japan to message more strongly that it is no longer
inclined to chase its elusive 2% inflation target, sources
familiar with its thinking say.
After years of trying to vanquish deflation by setting an
ambitious price goal, Japan's waning recovery prospects and a
dwindling policy tool-kit have made the BOJ more open to
conceding that the best it can do is to keep the economy afloat,
the sources said.
The need to protect the world's third-largest economy from a
sharp downturn has became a more urgent task for the BOJ,
particularly as external risks such the Sino-U.S. trade war and
a coronavirus outbreak in China weaken its ability to create a
virtuous growth cycle.
"While the inflation target remains very important, the
focus of the BOJ's policy has shifted toward keeping the economy
on a sustainable recovery path," one of the sources said.
The trade-reliant economy shrank at the fastest pace in six
years in the December quarter on soft consumption. Some analysts
see Japan tipping into recession as the coronavirus outbreak
disrupts supply chains and hits tourism. urn:newsml:reuters.com:*:nL4N2AE05X
Making matters worse is the rising prices of goods and
services, once welcomed by the BOJ as a sign of progress but now
seen as impeding domestic consumption at a time of intensifying
global pressures.
For one thing, the prices are being driven up by companies
passing on higher labour and material costs to consumers, rather
than an inflationary impulse reflecting improving demand.
Anaemic demand has been a perennial problem in Japan and one
that policymakers have tried, and largely failed, to address for
decades.
The BOJ has already been watering down its 2% price target,
after years of massive stimulus only succeeded in partially
firing up inflation even when the economy was in good shape.
Now, as the economy slows and faces business disruptions
from the coronavirus epidemic, central bank policymakers are
shifting their attention further away from the price goal, the
sources say.
Governor Haruhiko Kuroda and other BOJ executives no longer
stress their readiness to ease further to achieve their price
target. Instead, they say the bank will "patiently maintain" its
current stimulus to fend off risks to Japan's recovery.
"We would need to consider monetary policy steps if (the
virus outbreak) significantly affects Japan's economy," Kuroda
told a newspaper interview. urn:newsml:reuters.com:*:nT9N29K02J
PRICE HIKES A DRAG
Japan's economy ground to a halt in July-September last year
as the U.S.-China trade war hurt exports. A sales tax hike took
a toll on consumption the following quarter, dashing the BOJ's
hope that robust domestic demand will offset the weakness in
exports.
Household spending took a further hit as a growing number of
firms raised prices in time with the tax hike to pass on rising
labour costs to consumers.
Coca-Cola Bottlers Japan Holdings Inc 2579.T last year
raised the price of its bottled soda drinks for the first time
in 27 years, while Calbee Inc 2229.T raised prices for some of
its snacks and Nissin Food Products for its cup noodles.
Curry rice - a popular lunch dish in Japan - was also not
spared with restaurant chain Ichibanya Co forced to pass on
rising labour costs to its dish.
The impact of the price hikes on consumers, especially in a
weakening economy where confidence is low and wage growth
remains sluggish, has been telling.
Consumption sank 2.9% in the fourth quarter of last year,
marking the first drop in five quarters.
Three-fifths of Japanese firms plan to keep overall
compensation flat or even cut it in the coming business year, a
Reuters poll found, underlining the challenge of boosting
consumer spending and fostering sustainable economic growth.
urn:newsml:reuters.com:*:nL4N2AC0UC
"I want to order a set of cake and coffee at a cafe. But I
only order a drink now," said 70-year-old Kaori Yamada, who
spends less at coffee shops to save money.
Miki Suzuki, a 30-year-old who works in the service
industry, says she would use on-line fleamarket apps to buy
everything from clothes, cosmetics to soap.
"I buy vegetables at a place where farmers directly sell
them because that's much cheaper than getting them at a
supermarket."
The vulnerability of consumption to price hikes is forcing
the BOJ to distance itself even further from its price target,
the sources say. Annual core consumer inflation is currently
running at 0.7%.
The central bank released research last year arguing that
the optimal level of inflation could be lower than 2%, in
another sign of the BOJ quietly backing away from its insistence
on hitting the target.
"The BOJ's current approach is to underpin growth on hope
that inflation will eventually pick up," a second source said.
(Reporting by Leika Kihara and Kaori Kaneko
Editing by Shri Navaratnam)
((leika.kihara@thomsonreuters.com; +813-6441-1828; Reuters
Messaging: leika.kihara.reuters.com@reuters.net))