By Leika Kihara
TOKYO (Reuters) – The Bank of Japan is expected to upgrade its inflation forecast on Tuesday and acknowledge budding signs of change in the country’s deflationary mindset, as stubbornly high global commodity costs prompt more firms to raise prices.
But with inflation set to remain below its 2% target, the BOJ will likely stress its resolve to maintain its ultra-loose monetary policy even as its global counterparts move toward exiting from crisis-mode policies.
At its two-day meeting ending on Tuesday, the BOJ is widely expected to leave unchanged a -0.1% target for short-term interest rates and a pledge to guide long-term rates around 0%.
In a quarterly outlook report due out after the meeting, the BOJ will probably slightly revise up its inflation forecast for the year beginning in April from the current estimate of a 0.9% increase, sources have told Reuters.
Compared with its assessment in October, the latest report may emphasise rising inflationary pressure and a shift in the balance of risk on the price outlook, the sources said.
“Japan’s inflation will gradually accelerate as a trend due to improvements in the output gap, and heightening medium- and long-term inflation expectations,” BOJ Governor Haruhiko Kuroda said in a speech last week.
The central bank may also flag plans to conduct a thorough analysis on whether recent signs of quickening inflation would last.
Inflation is creeping up towards the central bank’s target not because the economy is gaining traction but because of external factors, complicating matters for policymakers trying to explain how the recent price moves could affect future monetary policy.
A spike in wholesale inflation and rising import costs from a weak yen have led to price hikes for a broad range of goods, hitting households at a time wage growth remains slow.
Some analysts expect core consumer inflation to exceed 1.5% around April, as the drag from last year’s cellphone fee cuts taper off and past rises in oil costs push up electricity bills.
With the rise driven by higher raw material prices, rather than a hoped-for uptick in domestic demand, the BOJ’s near-term priority is to avoid a transitory blip in inflation from fuelling market speculation of an early policy tightening.
Discounting rising price pressures too much, however, could dampen public perceptions of future price gains and derail the BOJ’s efforts to fire up inflation to its target, analysts say.
In debating the policy outlook, the BOJ will focus on whether wages would rise enough to give households purchasing power, allow firms to keep hiking prices and sustainably accelerate inflation, according to sources familiar with its thinking.
(Editing by Jacqueline Wong)
