BOJ lowers inflation projections for FY17-19 - Nomura

Analysts at Nomura note that the BOJ released Outlook for Economic Activity and Prices ("Outlook Report") on 20 July, lowering its inflation projections for FY17–19.

Key Quotes

“The median forecasts among BOJ policy board members for core CPI inflation (y-y, excluding impact of consumption tax hike) were revised down from +1.4% (FY17), +1.7% (FY18), and +1.9% (FY19) as of its April report to +1.1%, +1.5%, and +1.8%, respectively. It also pushed back the timetable for achieving its 2% inflation target from sometime in FY18 to sometime in FY19.”

“Looking at the BOJ's recent pattern of revisions, it tends to set bullish inflation targets at the start of the fiscal year before sharply lowering its outlook around the middle of the fiscal year, and its most recent revision appears to confirm this trend.”

“Continued gap in outlook for prices between BOJ and Nomura

While the BOJ has lowered its inflation projections they are still more bullish than both our forecasts and the market consensus. Market forecasts also differ widely, with the average forecast of the eight most bullish institutions differing markedly from the average outlook of the eight most bearish institutions in the July 2017 ESP Forecast survey. The BOJ's inflation outlook is slightly ahead of the average outlook for the most bullish institutions, while our forecast is largely in line with the average outlook for the most bearish institutions.” 

“The BOJ expects improvement in the output gap and a rise in medium- to long-term inflation expectations to boost inflation, but we think these factors will have only a limited impact. We think external factors such as forex rates and crude oil prices, along with the output gap, have played a bigger role in affecting inflation, and we think our differing views on the impact of these factors account for the gap between our inflation outlook and that of the BOJ.”

“In the near term we expect a continued boost to inflation from energy prices and a gradual recovery in the core portion. We assume a moderate economic recovery driven by external demand, and think the output gap will also narrow as a result. We think that will in turn boost the core inflation rate.”

“In recent years, the degree of market penetration by imports has risen, principally in durable consumer goods, making consumer prices in Japan more sensitive to exchange rate effects. As such, we think the rise in import prices owing to yen depreciation since the end of 2016 will gradually start to boost core inflation as the rise is passed on to prices for customers.” 

“As a result, we expect the core inflation rate to rise to nearly 1% y-y in the second half of 2017. After that, we think the inflation rate will gradually fall as the boost from energy prices disappears along with the disappearance of the inflationary impact of higher import prices stemming from the yen's depreciation.”

“If inflation were to fall in 2018 and beyond, in line with our forecasts, we think this would make it increasingly hard to attain the BOJ's 2% inflation target by its new timetable of sometime in FY19, prompting renewed speculation among market participants that the BOJ will embark on additional easing.”