BOJ gets halfway to inflation target as yen clouds outlook

Bloomberg

Japan’s key inflation gauge ticked up in February, putting the Bank of Japan halfway to its goal of 2 percent. Yet a strengthening yen and the threat of a global trade war underscore the central bank’s vulnerability to global markets and events.
Despite the progress made, inflation remains far from the BOJ’s target, while the yen’s 7 percent gain so far this year has raised the risk of price gains stalling. Even a modest decline in oil prices would work against the central bank, which blamed a price collapse in 2014 for its struggles to generate inflation.
BOJ Governor Haruhiko Kuroda has faced questions about when the central bank will begin normalizing its monetary policy, given a growing economy and moderately rising inflation. He underscored this month that “powerful” easing will continue, even as his global peers continue to tighten policy.
“The BOJ has no choice but to patiently continue easing,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management Co.
After stripping out external factors such as the exchange rate and oil prices, there is no confirmed inflationary trend in Japan, Goldman Sachs economist Tomohiro Ota wrote in a research report this week. If crude oil prices and the yen stabilise around current rates, core CPI will likely decelerate well below 1 percent from mid-year, Ota said.
“What’s creating headaches at the BOJ is the yen,” said Nobuyasu Atago, chief economist at Okasan Securities Co. and former head of BOJ’s price-statistics division, who said core inflation could sag in the second quarter because of weaker contributions from the exchange rate and oil prices. “I think it’s too early to be optimistic.”
To be sure, there are signs of progress in Japan’s real economy. It has expanded for eight straight quarters, and wages and domestic consumption have improved as the unemployment rate hit a 25-year low.
“A continued pickup in Japan’s inflation in February reflects building pressures from the positive output gap,” Bloomberg Economics’ Yuki Masujima wrote. “A headwind from yen strength, though, is likely to impede progress, keeping the core gauge around 1 percent year on year into 3Q.”