BOJ may upgrade forecast for CPI

The Bank of Japan (BOJ) may raise its consumer price forecast for next fiscal year as wholesale price falls narrow, but analysts say it will stick to its easing bias for now as deflation grinds on and firms struggle to pass higher costs on to consumers.

The central bank has given slightly more positive views on the economy in the past week, but analysts say weak domestic demand will make the process of getting out of deflation painfully slow.

One openly questioned the wisdom of the BOJ raising its consumer price index (CPI) forecast for the year to March 2012.

"If the BOJ upgrades this forecast they would be sending the wrong message to businesses and the foreign exchange market," said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney.

"It might signal less inclination to take further easing. I'm concerned Japan hasn't done enough, because consumers and businesses are still operating with a deflation mentality."

BOJ Governor Masaaki Shirakawa said yesterday the central bank would continue its efforts to beat deflation by maintaining its very loose monetary policy, but he gave no hints on whether additional easing measures were on the horizon.

Wholesale prices fell 1.3 per cent in the year to March, the smallest drop in more than a year as falls narrowed for the seventh straight month, but this was largely due to rising energy and commodity costs, BOJ data showed. Together with improvements in the economy, though, this may prompt the BOJ to revise up its consumer price forecast for the year to March 2012 in its twice-yearly outlook report due on April 30, sources familiar with the bank's thinking said.

"Both wholesale and consumer prices are likely to stay on an upward bias in coming months," said Junko Nishioka, chief Japan economist at RBS Securities. "But this is unlikely to lead to a change in the bank's loose monetary policy as the BOJ focuses on the price trend rather than short-term moves." The BOJ currently expects deflation to last for three years until March 2012. It will review that prediction in its twice-yearly outlook report.

It may lift its consumer price forecast for the year to March 2012 to zero change or slight positive growth from a 0.2 per cent drop forecast three months ago, the sources said.

Still, that is still far below the one per cent consumer inflation that Finance Minister Naoto Kan said he wanted to see, and roughly the level that the BOJ itself sees as signifying desirable price growth. Analysts also say slack domestic demand will continue to put downward pressure on consumer prices.

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