TOKYO -- The Bank of Japan is expected to lower its inflation forecast for the fiscal year beginning in April from 1.4% to around 1% and, if crude oil prices remain depressed, will likely push back the estimated time of arrival at its 2% target.
Amid fading hopes that the BOJ's current strength of monetary easing will drive the pace of consumer price growth it seeks, financial markets' attention has turned to the timing of its next move.
More than any other factor, cheap oil has frustrated the BOJ's progress on inflation. When the bank issued its inflation forecast in October, its assumed price for Dubai crude was $50 a barrel. Now, the Asian oil benchmark is trading in the 30s.
Should oil prices remain depressed, Japanese corporations and households may have trouble shaking off their deflationary mindset. The BOJ's Tankan survey of business sentiment and other gauges show a clear drop in inflation expectations. When people figure they can buy something cheaper later, business investment and consumer spending suffer.
Under Gov. Haruhiko Kuroda, the BOJ has sought to influence such expectations with its policymaking. Some observers thus expect it will deploy additional monetary easing to nudge consumer and business sentiment in the right direction. Kuroda justified the bank's surprise October 2014 expansion of its asset-buying program by arguing that the easing mechanism would falter if doubts emerge about achieving 2% inflation.
By the same reasoning, "now more than ever is the time to act," said Yuji Shimanaka, an economist at Mitsubishi UFJ Morgan Stanley Securities.
But the BOJ finds itself in an awkward position for quick action. The bank has been adding to its holdings of Japanese government bonds at an annual pace of 80 trillion yen ($665 billion). This has it buying a total of 120 trillion yen worth of JGBs a year, including the replacement of those reaching maturity. Hence the BOJ's reluctance to scale up purchases -- it is already buying the bulk of newly issued JGBs from the secondary market. "Supplementary" easing measures introduced in December amounted to mere technical changes, such as buying bonds with longer to go until maturity.
Many BOJ watchers reckon it can expand monetary easing only once or twice more. With an eye to a stronger yen and other risks, it is essentially waiting for the best moment to play its few remaining cards. Inflation considerations aside, additional monetary easing could help prepare the economy for a consumption tax hike set for April 2017.
U.S. monetary policy exerts perhaps the biggest influence on the course of the BOJ's actions now. The Federal Reserve raised interest rates for the first time in nine and a half years in December and is expected to continuing tightening in 2016. Should it pause, four years of weakness in the yen relative to the dollar could reach a turning point. The BOJ may find itself having to resort to additional easing to curb yen appreciation.
The BOJ would also be driven to act if its core inflation gauge, which excludes fresh food and energy, loses upward momentum owing to the currency factor. Until now, Kuroda has insisted that trend inflation is steadily improving.
With a Japanese upper house election looming in the summer and U.S. voters choosing a president in November, some see little chance of big monetary policy changes in the second half of 2016. Has the BOJ taken "a practical bent," as Izuru Kato of Totan Research says? Or will Kuroda and company deliver another surprise? The answer is likely to become clear by spring.