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Economy

BOJ forecasts are more than wishful thinking

The Research and Statistics Department is in the Bank of Japan Annex Building.

TOKYO -- Many private-sector economists continue to respond coldly to the Bank of Japan's semiannual report on price and economic outlooks.  

     "It's not an objective forecast (by the central bank), it's a wish," one said.

     The latest report, released April 30, showed the BOJ's price projections for fiscal 2016 for the first time. It said that the Japanese economy will largely achieve the central bank's 2% inflation target for two consecutive years through fiscal 2016.

     But according to the Japan Center for Economic Research's ESP Forecast survey for April, only two out of 41 private-sector economists believe that the 2% target will be achieved by fiscal 2015.

     The BOJ's "bullish" outlook may contain the bank's hopes for boosting people's inflationary expectations and reducing real interest rates. But it is wrong to think that all of the BOJ's price forecasts are such a discretionary one.

     In fact, there are two different types of BOJ price projections. One is the projection for 1 to 2 years ahead, which the bank shows in the semiannual outlook report. The other is a monthly forecast for the next six months or so, which is included in its Monthly Report of Recent Economic and Financial Developments and contains more objective content.

     A careful look at the bank's monthly reports from May last year through to now shows that its projections of the year-on-year changes in consumer price index has proved to be remarkably accurate. 

     For example, the BOJ said in June 2013 that "The year-on-year rate of change in consumer prices is likely to gradually turn positive." And true enough, the prices that were announced later moved that way. The same applies to the bank's August report, which said, "The year-on-year rate of increase in consumer prices is likely to rise gradually."

     Also, since the bank said in January this year, "The year-on-year rate of increase in consumer prices is likely to be around 1 1/4 percent for some time." the situation has continued as such.

Frontline research

It is not surprising that the outlooks are precise, because the BOJ's Research and Statistics Department conducts surveys with unparalleled thoroughness. The department meticulously interviews people working in relevant industries about their forecasts over the next few months for the prices of some 600 goods and services that are covered by the internal affairs ministry's CPI calculations.

     If you call the process of making long-term forecasts in the outlook report a top-down approach -- based in part on the BOJ's policy goals -- then monthly reports are bottom-up -- based on reports from the frontline.

     This bottom-up approach can be said to be unique to the BOJ. A senior BOJ official said that the central bank has been making one-month forecasts with a margin of error of plus or minus 0.05%. The bank has even been able to make rough forecasts for three months ahead, the senior official said.

     The BOJ said that the inflation would hover around 1-1.5% in the first half of fiscal 2014 and then approach to 2% toward fiscal 2015. The bank also said it is ready to "adjust policy" with additional monetary stimulus, should such downward risks as weakness in exports or the negative impact of the sales tax hike threaten to derail the economy from the path it envisages.

     An inflation falling below 1% by the start of autumn, for instance, is deemed a risk and may prompt the BOJ to take actions.

     What is important here is that the BOJ does not take actions after risks become apparent to anyone, following the release of CPI by the internal affairs ministry. That's because -- as I wrote above -- the BOJ is able to grasp price trends for the next few months with considerable accuracy. The CPI of any given month is released at the end of the following month. The BOJ does not intend to wait so long.

     So if the BOJ can make fairly accurate forecasts for the next three months, it can almost predict the price trends, say, for July through September by the time official CPI data for May are released in late June. And if it detects risks ahead, the BOJ is likely to take pre-emptive action to avoid acting after such risks become evident to anyone.

     The BOJ's unorthodox easing policies are meant to pre-empt market moves and to have a psychologically positive impact on stocks and currency. For this reason, the BOJ highly values an ability to predict price trends.

     The BOJ's forecasts are not simply wishful thinking. They are based on objective research.

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