Bank of Japan poised to predict strongest inflation in 30 years

The bank will release the forecasts on April 28 after a two-day policy meeting. PHOTO: REUTERS

TOKYO (BLOOMBERG) - Bank of Japan (BOJ) governor Haruhiko Kuroda faces another awkward communications challenge later this month when the central bank updates forecasts widely expected to predict the strongest annual inflation since 1992 outside tax hike years.

With global central banks accelerating interest rate hikes to tackle inflation, Mr Kuroda will have the task of explaining why he is insisting on staying wedded to stimulus when the BOJ itself sees price growth at the fastest pace in decades. Surveyed economists see key consumer prices rising 1.8 per cent in the year that started in April, compared with the BOJ's current forecast of 1.1 per cent.

SMBC Nikko Securities economists go further, forecasting inflation of about 2.5 per cent for this fiscal year in a report earlier this week.

Those views are fuelling expectations that the central bank will have to bump up its quarterly economic projection well beyond the 1.2 per cent level that marks the strongest price gains in 30 years after excluding the impact of sales tax increases in 1997, 2014 and 2019.

The bank will release the forecasts on April 28 after a two-day policy meeting. The governor, now in his 10th and final year at the helm of the central bank, will need to calibrate his messaging to minimise giving the impression that the BOJ is close to accomplishing its inflation mission, a view that could fuel speculation the BOJ will adjust policy this year.

"The BOJ will try to make it clear that it won't pivot even with an upgrade of its inflation forecast," said Hamagin Research Institute chief economist Eiji Kitada. "It is just natural to upgrade the inflation outlook after energy prices have soared. What is important is how they judge its sustainability."

Mr Kuroda has repeatedly said that prices pushed up by rising costs alone are not the stable gains he seeks and that the central bank must keep its stimulus on tap. The divergence from the messaging of the Federal Reserve and other central banks has put pressure on the BOJ's rock-bottom yield target and driven the yen to its weakest level in 20 years.

Mr Kuroda said last week that cost-push inflation would weigh on the economy and that any tightening of policy could hit the economy by causing a "considerable" negative impact on corporate profits, employment and wages.

The governor's insistence that the economy still needs stimulus is helping drive the yen down, prompting Japanese government officials to try to stem falls through remarks calling for stability in currency markets.

Finance Minister Shunichi Suzuki reiterated that view on Friday (April 15), though his remarks failed to stop the currency reaching a fresh 20-year low.

"There will probably be some sizeable revisions in both the BOJ's growth and price forecasts," said Mr Hideo Hayakawa, former chief economist at the central bank. Mr Hayakawa expects a policy adjustment as soon as July to stop the weakening of the yen.

Another former BOJ chief economist, Mr Kazuo Momma, expects the new price forecast to be around 1.5 per cent. The central bank is also expected to significantly downgrade its economic growth projection for this fiscal year from 3.8 per cent to reflect the impact of the Omicron wave and fallout from soaring commodity prices fuelled by the war in Ukraine.

The outlook report will also include an inflation projection for fiscal year 2024 for the first time. Forecasts for the coming years could be critical factors for analysts trying to predict if there will be any policy changes under a new regime after Mr Kuroda or even before.

Join ST's Telegram channel and get the latest breaking news delivered to you.