Japanese companies cast doubt on BoJ inflation target

Japanese companies are pessimistic that the Bank of Japan can hit its 2 per cent inflation target - a key element in the Abenomics programme - suggesting that governor Haruhiko Kuroda may have to employ more monetary easing to demonstrate his determination to reach it.

Since assuming control of the BoJ for a five-year term last April, Mr Kuroda has focused on overturning entrenched expectations of deflation in the world's third-largest economy. His first act was to sweep away the old monetary easing regime, vowing to buy enough longer-term government bonds to double Japan's monetary base by the end of 2014. In doing so, he pledged to hit a 2 per cent target for inflation - double the previous target - within a period of about two years.

Yet in a BoJ survey of 10,000 companies published on Wednesday respondents said that they expected prices to rise at 1.5 per cent one year from now, then remain at 1.7 per cent after three and five years ahead. Large non-manufacturers had a particularly subdued outlook, anticipating that prices will be rising at 1.2 per cent five years from now.

"The outcome should be an important input for policy discussion," said Masamichi Adachi, economist at JPMorgan in Tokyo, noting that the five-year view for all companies - an initial 1.7 per cent - may emerge as Japan's benchmark for long-term corporate inflation expectations. "The finding that corporate managers do not believe a 2 per cent inflation target can be achieved in coming years should be a strong reason for additional easing."

One interpretation of the result is that companies are nervous about the impact on the economy of a two-stage increase in consumption taxes, designed to put the government's stretched finances on the road to repair. Japan raised the tax for the first time in 17 years on Tuesday, from 5 per cent to 8 per cent, and plans to go to 10 per cent in October 2015.

Wednesday's survey may also reflect doubts over the feasibility of further yen weakness, which was the main driver behind last year's steep rise in core CPI, from minus 0.5 per cent last March to 1.3 per cent in February. Last year's radical easing coincided with the biggest annual slide in the yen since 1979, causing trading partners in Korea, China and elsewhere to complain that Japan was manipulating its currency for unfair advantage.

Companies' doubts over the BoJ's target are echoed in the bond market, where investors also expect inflation to fall short of 2 per cent over the long-term. The difference between the yields on regular 10-year bonds and inflation-linked bonds - the "break-even rate" - has climbed steadily in recent months but stood at 1.24 per cent on Wednesday.

Koichi Hamada, a close adviser to Prime Minister Shinzo Abe, has been urging the BoJ to take action sooner rather than later to arrest a post tax increase slump. The Yale University professor said last week that the BoJ should present fresh measures in April or May, if data suggested that consumption had been badly hurt by the tax rise. On Tuesday evening NHK, the national broadcaster, reported that some retailers had seen about a 70 per cent drop in business from a year earlier.

"We think the message from a weak [survey] result would be how far the BoJ needs to ease monetary policy to amplify inflationary expectations still further," said Daiju Aoki, economist at UBS in Tokyo.

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