April 10, 2014 6:32 am JST

BOJ seen predicting 2% inflation for fiscal 2016

TOKYO -- The Bank of Japan is likely to predict that inflation will remain around 2% in fiscal 2016 in its next Outlook for Economic Activity and Prices, due out April 30.

     In the October 2013 edition of the semiannual report, the BOJ saw the consumer price index rising at a year-on-year pace of 1.9% next fiscal year, excluding the effects of the recent consumption tax hike. In other words, both the fiscal 2015 and fiscal 2016 figures would show inflation around the central bank's much-touted 2% target.

     The supply-demand gap all but disappeared for the first time in five and a half years in the October-December quarter, suggesting that growing demand could trade places with the weak yen as an inflationary factor.

     The central bank's latest Monthly Report of Recent Economic and Financial Developments, released Wednesday, shows that the supply-demand gap came to minus 0.1% for the October-December period -- the best reading since the 0.7% seen between April and June of 2008. This suggests that the Japanese economy has almost rid itself of its demand shortage.

     The aggregate supply-demand balance likely swung above zero for the first three months of the year as Japanese consumers rushed to stock up on goods of all kinds before the consumption tax rose April 1.

     While a post-hike demand recoil may cause the gap to turn negative again for the April-June quarter, the BOJ expects the indicator to be firmly fixed in positive territory in the July-September quarter and beyond.

     In a news conference after a policy board meeting Tuesday, Gov. Haruhiko Kuroda emphasized that the inflation target is "certain" to be reached. He offered reassurance that it can be met even without further weakening of the yen, suggesting that improvement in the supply-demand gap may serve as a new inflationary force.

     Until now, the yen's slide has helped push up prices by raising costs for importing fuel as well as other commodities and goods. With the Japanese currency's descent slowing, many economists believe that weak-yen-triggered inflation will likely come to a standstill. The Japan Center for Economic Research's ESP Forecast Survey has market economists estimating inflation of about 1% in fiscal 2015.

     In the upcoming outlook report, the BOJ is expected to outline a scenario where an improving employment situation and higher wages spur demand, contributing to "good" inflation.