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November 1, 2018

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BoJ cuts inflation forecast again, 2% target remains out of reach

Japan’s central bank revised down inflation forecasts again yesterday, in the latest sign it has failed to make headway toward its 2 percent target despite years of massive monetary easing.

After a two-day meeting it left its easing program in place, as expected, and slightly lowered the inflation forecast for the fiscal year ending March 2019 to 0.9 percent from 1.1 percent.

The revision, in a quarterly report, comes after it earlier this year dropped a 2020 target for the long-standing goal.

“The momentum toward achieving the price stability target of 2.0 percent is maintained but is not yet sufficiently firm,” the BoJ said in the report.

It also lowered forecasts for the coming years, projecting a 1.4 percent rate for fiscal 2019 and 1.5 percent for fiscal 2020.

Those figures do not factor in the effects of a consumption tax hike expected to go into effect around October next year.

“The inflation rate for 2019 and 2020 remain almost unchanged... I don’t think the big picture on inflation has largely changed,” BoJ chief Haruhiko Kuroda told reporters.

He said the bank was carefully monitoring the China-US trade row but that its impact on Japan’s economy was so far “limited” but he warned “if the conflict lingers, it is possible there will be more impact.”

Other risks the bank is watching include the economy in Europe, Brexit negotiations and Italy’s budgetary standoff with the European Union, he said.

The BoJ has struggled for years to reach the 2 percent inflation rate thought necessary to turbocharge Japan’s economy, and has defended its decision to maintain its monetary easing even as other central banks tighten policy.

It blames a “deflation mindset” caused by consumers and employers used to long periods of low growth and deflation.

In its report it said companies remained “cautious” when setting prices and wages, with households similarly careful on spending.

The bank has been criticized for the consequences of its policy, including concerns that its massive purchases are skewing bond and financial markets.

In a nod to those concerns, it said in July it would seek to keep yields on benchmark 10-year government bonds around zero percent. But there are no expectations that it will follow the lead of the US Federal Reserve and European Central Bank and move toward tightening.


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