By Leika Kihara
SAPPORO, Japan (Reuters) – Bank of Japan Deputy Governor Kikuo Iwata said on Wednesday the timing for achieving the bank’s 2 percent inflation target has been “somewhat delayed” from its initial projection.
But he said that with the underlying trend of inflation improving steadily and wages on the rise, Japan will likely hit 2 percent inflation around the first half of next fiscal year, beginning in April.
“At this moment, the BOJ has no intention of changing its commitment of achieving its price target at the earliest possible time,” he told business leaders in Sapporo, in the northernmost Japanese prefecture of Hokkaido.
In a news conference, Iwata acknowledged that public perceptions of future price rises could be dampened if falling fuel costs and electricity bills slow overall inflation.
“There’s a risk that if prices continue to fall for a long period of time, that will affect inflation expectations … The risk of that happening is small for now but we can’t rule this out completely,” Iwata said.
The BOJ pushed back the timing for achieving its ambitious inflation target on April 30, saying it now expects the goal to be met sometime by around September next year.
Many analysts still see that forecast as too optimistic and expect the bank to ease policy again later this year.
The move also jars with the BOJ’s commitment, made when it deployed its aggressive stimulus in April 2013, that it will aim to achieve 2 percent inflation in “roughly two years.”
NEXT TIME WILL BE DIFFERENT
Iwata, a former academic and an architect of the current stimulus program targeting base money, has been among those in the board who share Governor Haruhiko Kuroda’s optimism on the prospects for hitting 2 percent inflation.
But minutes of the April 30 meeting showed three of the nine board members wanted to allow themselves more time to hit the target or water down the commitment.
Iwata said what made the BOJ’s current stimulus, dubbed “quantitative and qualitative easing,” more effective than past policies was the fact the bank committed to a specific timeframe for hitting its price target.
While the timing for achieving 2 percent inflation may have been delayed somewhat, price growth will accelerate as private consumption rebounds from the slump that followed last year’s sales tax hike and companies ramp up spending, he said.
Iwata said the tax hike to 8 percent from 5 percent in April last year took a heavier toll on the economy than expected largely because the recovery was still fragile, and the public wasn’t convinced yet that deflation will be eradicated.
But the economy will be more resilient to such pain when Japan raises the tax rate again in 2017, as households and companies would have become more confident about the country’s growth prospects, he said.
“I expect economic conditions to be different and more positive in 2017 than in 2014,” Iwata said.
The government plans to proceed with the second tax hike, which was delayed from the initial schedule of October 2014, in April 2017 as part of efforts to fix Japan’s tattered finances.
(Editing by Kim Coghill)