The Bank of Japan (BOJ) is scheduled to end its two-day interest rate policy meeting on January 22, 2014, and shall announce its latest rate decision in the afternoon (Tokyo time). It is expected that BOJ Governor, Mr. Haruhiko Kuroda together with his team will keep rates steady at close to zero percent, while continuing to maintain its bond purchases programme. The BOJ’s inflation target of 2.0 percent is not expected to be altered, and Japan has seen some positive growth in the form of its core Consumer Price Index (CPI) numbers which showed some signs of an upward momentum late last year.
In the lead up to the upcoming rate announcement by the BOJ, there was a January 20, 2014 Thomson Reuters news article which was published online where it quoted that Japan’s Economy Minister, Mr. Akira Amari has made some comments indicating that Japan has appeared to escape deflation, but warmed that the risks of it returning back cannot be entirely ruled out. Japanese policy makers will continue with their efforts to foster sustainable growth. In fact, in a January 21, 2014 video interview made with Mr. Olivier Blanchard, who is currently serving as a International Monetary Fund (IMF) as its economic counsellor. In the video interview aired on the organisation’s website, he spoke out of his concerns that the risk of deflation continues to linger in many advanced economies, due to the size of the output gaps, and relatively low economic growth seen in many parts of Europe, and moderate growth in China. On Japan, the IMF has maintained its economic growth forecast for 2014 at 1.7 percent, and 1.0 percent in 2015, but remains hopeful that the temporary fiscal stimulus, in the form of ‘Abenomics’ should partly offset the drag from the consumption tax hike in April 2014.
With the revised economic outlook issued by the IMF for Japan, along with the ongoing economic reforms under ‘Abenomics’, there is a question of whether the BOJ could do more to help boost economic growth beyond what was estimated by the IMF in 2014. By not unleashing its monetary policy tool of lowering rates, and maintaining its bond buying programme, it is expected by many market observers that the BOJ will likely want to reserve some of the monetary stimulus until after it has fully analysed the impact of the consumption tax hike in April 2014 will have on the Japanese economy in the form of consumer spending, retail sales figures and capital expenditures by the businesses. So far, retail spending levels have remained relatively stable, but wage growth continues to be stagnant despite various efforts by the Japanese government to motivate businesses to increase their wage levels in order to cope with the rising consumption tax rate hikes. I believe that it is quite clear that without any better insights as to the outlooks of corporate tax reforms, production incentives, businesses hesitate to increase their capital expenditures, and it will also impact their decisions on whether to raise wages, in anticipation of cost pressures coming from raw materials, hiring, among others. Morevover, with the relatively slow kickstart of the damaged nuclear power plant facilities following the March 2011 triple disasters, electricity prices and oil consumption costs have been raised, thus placing some limitations of any wage hike decisions by most Japanese businesses, so as to be prepared to cope with the rising input costs.
The inflation target of 2.0 percent set by the BOJ is increasingly looking quite impossible to be met this year, or in 2015 due to the lack of wage growth, slow progress being made on the structural reforms, lack of any increase in spending coming from individuals and businesses. The consumption tax hike to 8.0 percent from the current 5.0 percent, and 10.0 percent in 2015 might create some challenges for the BOJ to manage as it tries to ease some of the concerns about deflationary risks. Critics have warned that BOJ might be forced to change its timeframe and possibly extend its timeline of reaching the official inflation target by more than two years. However, risks continue to remain about extending the timeline as it might not even reach its inflation target beyond the two years despite the various economic reforms being introduced by the Japanese government. There is also a risk that the weakening Japanese Yen currency could start to strengthen, thus eliminating any hopes of Japan returning back to normalised inflationary growth.