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BoJ sees zero inflation in Abenomics setback

Posted by pakin On March - 17 - 2015

TOKYO – The Bank of Japan on Tuesday said tumbling energy prices could push inflation to zero, marking another setback for Tokyo’s attempts to kickstart the economy by conquering years of falling or stagnant prices.

While the central bank repeated its view that inflation expectations were “rising on the whole” — and it held fire on launching fresh stimulus — the commentary strikes another blow to efforts to reach a sustained two percent inflation level.

Tokyo’s campaign to stimulate spending faltered after the government raised the country’s sales tax last year to help pay down Japan’s enormous national debt.

That hammered consumer spending and led to a brief recession, while falling oil rates have pulled the carpet on energy-led price increases.

“The year-on-year rate of increase in the consumer price index…. excluding the direct effects of the consumption tax hike, is in the range of 0.0-0.5 percent,” the BoJ said in a statement after a two-day policy meeting.

But it added that inflation “is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices”.

Investors will now be following BoJ chief Haruhiko Kuroda’s regular news briefing later Tuesday for clues about the bank’s plans for its massive two-year-old stimulus.

Kuroda has repeatedly said the bank would further loosen monetary policy if necessary. And policymakers shocked markets in October when they expanded the scheme — which pumps cash into the banking system to kickstart the wider economy — to a rate of about 80 trillion yen ($679 billion) annually.

“While the Bank of Japan kept its powder dry today, we still think that policymakers will step up the pace of easing at the end of next month to signal their determination to hit the two percent inflation target,” Marcel Thieliant from Capital Economics said in a commentary.

The BoJ’s inflation target is a cornerstone of Prime Minister Shinzo Abe’s drive to resuscitate Japan’s fortunes, dubbed Abenomics, which also includes big government spending and an overhaul of the country’s highly regulated economy.

Japan limped out of recession in the last quarter of 2014 with tepid 0.4 percent growth.

However, inflation in January was just 0.2 percent, the lowest since a zero rate in May 2013, just after the BoJ unleashed its monetary easing programme.

Prices had been on the rise, largely due to Japan having to import pricey fossil fuels to plug an energy gap left by the shutdown of atomic reactors in the wake of the 2011 Fukushima accident.

But plunging oil prices have dealt another blow to the BoJ’s inflation goals, and doubts are growing over the ambitious target — even among bank policymakers.

Minutes from the central bank’s January meeting showed that three of nine BoJ board members doubted the chances of reaching the price target by next year.

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