Bank of Japan Is Said to Consider Lowering Inflation Outlook

(Bloomberg) -- The Bank of Japan is considering a small cut to its inflation projection for this year in a quarterly report to be released next week, according to people familiar with the central bank’s discussions.

The BOJ may lower its forecast for core inflation from 1.1 percent for the fiscal year ending in March 2018, said the people, who asked not to be named because talks are private. A final decision on whether to lower the forecast and the size of any possible cut won’t be made until the policy meeting ending on Oct. 31.

There is less likelihood of any significant changes to the price outlook for later years, according to the people. The BOJ doesn’t see the need to expand its stimulus because it has concluded that the improving output gap and tightening labor market will continue to push inflation higher over the longer term, they said.

Still, lowering the price forecast will reinforce the widespread view that the BOJ will carry on its massive easing program long after its global peers have moved in the opposite direction. Such policy divergence could help weaken the yen to around 120 versus the dollar, former BOJ board member Sayuri Shirai said.

On the broader economy, the continuing recovery means the BOJ policy board is likely to discuss changing its view that risks are “skewed to the downside,” according to some of the people familiar with the central bank’s discussions.

After spending nearly all of 2016 in negative territory, the core inflation gauge -- which excludes fresh food -- rose to 0.7 percent in August, the highest in more than three years if the effects of a 2014 sales-tax hike are excluded. Yet that figure remains far below the BOJ’s target of 2 percent, as well as its forecast for the current fiscal year.

Governor Haruhiko Kuroda last week acknowledged factors weighing on inflation, citing falling fees for mobile phone services and related products, as well as companies cutting their business hours to absorb the pressure of rising labor costs.

Some economists say inflation won’t rise much higher, noting that the effects of higher oil prices will soon begin to fade. Private economists forecast core inflation to be 0.6 percent this fiscal year and 0.7 percent next year, according to a Bloomberg survey this month.

The BOJ’s new forecast is likely to be 0.8 percent for this year, and it could even trim its outlook for the following year as well, Maiko Noguchi, a senior economist at Daiwa Securities and a former BOJ official, wrote in a report on Oct. 11.

Noguchi said it was possible the central bank raises its economic growth forecast to 1.9 percent from 1.8 percent for the current year.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net, Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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