Roundup: Japan's central bank stands pat on easing, slashes inflation forecast for FY 2015 on tumbling oil prices

The Bank of Japan (BOJ) on Wednesday maintained its massive monetary easing policy and left unchanged its view of the economy, but the central bank slashed its inflation forecast for the next fiscal year as the recent oil glut and falling prices for crude have hindered the BOJ's inflationary efforts. At its two-day policy board meeting ending Wednesday, the bank said it will maintain its primary policy of increasing the monetary base at an annual pace of 80 trillion yen (674 billion U. S. dollars), through large asset purchases, with no further easing being unrolled, based on the banks' view that "Japan's economy has continued to recover moderately as a trend."

The bank staying pat on its monetary policy was widely in line with leading economists' expectations, but the BOJ downgrading its inflation forecast took both local economists and markets by surprise, with the news sending the yen higher versus the U.S. dollar and sending investors after profits, which saw the Nikkei close down 0.49 percent on Wednesday, with exporter shares in particular, stung by the yen's rise against its U.S. counterpart.

The bank's latest price outlook, which spans the three years to March 2017, saw the BOJ cut its price forecast as measured by the core consumer price index (CPI) for fiscal 2015 starting April,to 1 percent from an initial 1.7 percent, meaning the bank will likely miss its own inflation target of 2 percent in as many years as the original deadline is approaching early next year.

Koya Miyamae, an economist at SMBC Nikko Securities Inc. noted that were it not for falling oil prices the bank would still be on target to hit its inflation goal in a timely manner, but as things stand at the moment by, "October it will be hard for the BOJ to argue inflation will reach 2 percent in or around fiscal 2015. That's when they will be forced to expand stimulus."

To this end, Bank of Japan Governor Haruhiko Kuroda told a post- meeting news conference Wednesday that the timeframe for the bank achieving its price target would remain "largely unchanged," although suggested that the target would be "sometime" in fiscal 2015, rather than the beginning of it, as he and the bank had previously stated.

"Consumer inflation will slow for the time being due to oil price falls. On the assumption that oil prices will flatten out at current levels and rise moderately ahead, the effect of the oil price decline will ease. If so, we expect consumer inflation to reach 2 percent in a period centered on fiscal 2015," Kuroda told a news conference, adopting the expression, "centered on fiscal 2015," for the first time.

In the longer term, Kuroda maintained that the falling prices of oil could help Japan's inflation aims in the longer term, but suggested that there would be no more easing as there was in October even under similar circumstances, as households and company inflation expectations remain firm, with the BOJ chief unwavering on the bank's commitment to achieving its 2 percent inflation goal, regardless of how commodity markets move. "The effect of crude oil price falls will fade, while the lower fuel cost will benefit the economy. If so, oil price falls will help accelerate inflation in the long run. But the timing for achieving 2 percent may move around a bit because crude oil prices are pretty volatile," said Kuroda, adding "Our timeframe doesn't mention which month we will achieve 2 percent inflation. But there 's no change to our view that level will be achieved in a period centering fiscal 2015." "In October, we eased because of crude oil price falls and the pain from the sales tax hike in April were affecting inflation expectations and risked affecting wage negotiations, but fortunately, inflation expectations of households and companies remain firm even as break-even inflation is falling," the BOJ chief said. Kuroda went on to say that the bank saw no need in changing its view that inflation expectations will heighten long-term and was confident in its ability to achieve its weighty purpose, albeit within a slightly more "flexible" timeframe, as crude oil moves could go wayward again in the future. "We've been saying that 2 percent inflation will likely be achieved in a period centering fiscal 2015, so there's a possibility the timing may stretch into fiscal 2016. We haven't said strictly that the target will be achieved in fiscal 2015. We don't now how crude oil prices will move in the future. We don't know whether they will move in line with our estimates. There's some room for flexibility," Kuroda stated.

Kuroda concluded that if it looked unlikely the bank would fail to hit its target, as many leading economists believe will be the case, due to deflationary issues such as oil prices, the bank stood poised to change its policy without hesitation. "We must achieve our 2 percent price target regardless of whether commodity prices rise or fall. It's important that 2 percent inflation is achieved in a stable and sustainable manner. There's no change to our stance: we will adjust policy without hesitation if we feel Japan is deviating from the path of achieving 2 percent inflation," the BOJ chief stated unequivocally. Endi