The Bank of Japan (BOJ) yesterday hiked its full-year inflation forecast, but cautioned that it sees rising prices, driven by a surge in commodity costs caused by the Ukraine war, as a temporary and volatile trend.
Despite climbing prices and a slump in the yen to a 20-year low against the US dollar, the BOJ left its ultra-loose monetary policy unchanged.
It revised its inflation projection for the 2022-2023 fiscal year to 1.9 percent — sharply up from its previous forecast of 1.1 percent.
Photo: Suguro Yuma, Jiji Press/Bloomberg
The figure, which excludes fresh food, is just below the bank’s long-standing 2 percent target, but the BoJ views recent rises as a short-term trend and is calling for continued efforts to achieve sustainable economic growth.
Consumer prices are “likely to increase temporarily to around 2 percent — due to the impact of a significant rise in energy prices — in fiscal 2022,” it said.
“However, the rate of increase is expected to decelerate, because the positive contribution of the rise in energy prices to the CPI [consumer price index] is likely to wane,” it said.
Last month, core consumer prices rose 0.8 percent — the fastest increase in more than two years — as oil prices soared.
However, excluding energy, prices were down 0.7 percent.
Although the bank’s revised inflation forecast is “broadly in line” with its 2 percent target, “a hike to the policy rate remains off the table as none of the acceleration in inflation is being driven by domestic demand,” Tom Learmouth of Capital Economics wrote.
The BOJ now expects the economy to grow 2.9 percent this fiscal year, against its previous forecast of 3.8 percent. However, it also predicted a 1.9 percent expansion in 2023-2024, from its previous projection of 1.1 percent.
Bank policymakers left their inflation forecast for 2023-2024 unchanged at 1.1 percent.
The announcement followed a two-day policy meeting and comes with the yen at its weakest level against the US dollar since 2002, because of the widening gap between Japan’s loose monetary policy and the US Federal Reserve’s increasingly hawkish tilt.
The BOJ has suggested that the benefits of a weaker yen, particularly for major Japanese exporters, outweigh the disadvantages, but this messaging has become more difficult to sustain in the face of growing concern.
A weaker yen is particularly problematic for resource-poor Japan, which relies on energy imports, and in recent weeks, politicians have expressed concern about the speed of the currency’s slump.
However, no intervention appears on the horizon, although the government this week unveiled a new economic package including cash handouts for low-income families and an expansion of fuel subsidies to cushion the impact of rising prices.
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