Japan is unlikely to hit its 2 per cent inflation target this year in spite of a massive round of monetary easing, according to economist Marcel Thieliant at Capital Economics.
The Bank of Japan (BoJ), under governor Haruhiko Kuroda, introduced a new easing policy dubbed ‘quantitative and qualitative easing’ (QQE) in April last year. It aims to achieve 2 per cent inflation by April 2015, but Capital Economics remains unconvinced the policy in its current form will be sufficient to lift inflation towards the target by the end of this year.
“Import price inflation has already started moderating and will likely fall sharply even with a further gradual weakening of the exchange rate,” Mr Thieliant said.
“As a result, we expect consumer prices – excluding the impact of the consumption tax – to be rising less rapidly at the end of both this year and next than they are now. The upshot is that Mr Kuroda’s first year in office has been a success, but the BoJ still has work to do and we expect it to extend asset purchases throughout 2015 and also step up the pace.”
However, the economist said he was encouraged by the new aggression and clearer communication under Mr Kuroda’s leadership.
“The central bank’s ‘shock and awe’ approach is a welcome departure from the gradualist ways of previous experiments with balance sheet expansion,” he added.
Japan’s QQE involves buying up roughly ¥60-70trn (£353-£412bn) worth of assets a year, which implies an expansion of the assets held on the bank’s balance sheet to ¥270trn by the end of 2014.
Mr Thieliant said previous monetary stimulus in Japan had been gradual, with the Bank announcing incremental increases in targets during the course of several years. In contrast, under QQE the BoJ set aggressive targets right from the start, removing most of the uncertainty about the direction of monetary policy.
This led to an initial strong rally in Japanese equities, with the Nikkei 225 index rising nearly 30 per cent in the first two months following the introduction of QQE, but it has since traded broadly flat, and has even fallen 14.6 per cent in local currency terms since the start of the year.
Japan’s recent consumption tax hike from 5 per cent to 8 per cent has been cited as the major cause for this slump, but Mr Thieliant said he expected the central bank to take a relatively sanguine view with so much additional stimulus in the pipeline.
“It is not as if no one knew the hike was coming and the impact has been factored into economic forecasts since October 2012,” he said.
“Economic theory and what happened after similar tax increases in the past suggests a sharp drop off in activity but the Bank will continue to buy assets and expand the monetary base at a rapid pace at least until the end of this year, helping to support the economy through the tax hike.”
The manager’s view
Simon Somerville, manager of the £556.2m Jupiter Japan Income fund, says a healthy level of inflation – a major target for prime minister Shinzo Abe and central bank governor Haruhiko Kuroda – is vital for the country.
“In the short term, the recent consumption tax rise is the obvious risk, with another possible hike to come later in the year,” Mr Somerville said.
“This is the right policy as Japan needs to broaden its tax base but if it has a damaging impact on the economy, then that will be a serious problem for Abenomics. We feel investors have got overexcited about the so-called ‘third arrow’, with structural change rarely implemented quickly.”
Following the consumption tax hike, Mr Somerville expects a possible corporate tax cut in due course, which he said would be a clear positive for his favoured high cashflow and high return on equity businesses and could prove a major market driver later this year.
