Another BOJ Price Downgrade Chips Away at Forecast Credibility

Jan 23 2019, 3:27 AMJan 23 2019, 5:25 AMJanuary 23 2019, 3:27 AMJanuary 23 2019, 5:25 AM

(Bloomberg) -- The Bank of Japan’s revision of its price forecast for the year starting April is the biggest downgrade in three years, continuing the BOJ’s poor track record of projecting inflation in the Kuroda era.

Sharply lower oil prices since autumn made a lowering of the forecast inevitable given that energy costs have contributed as much as three-quarters of recent growth in overall consumer prices.

Under the leadership of Governor Haruhiko Kuroda, the BOJ has established a pattern of projecting overly optimistic inflation levels for coming years, only to repeatedly lower the forecasts as reality fails to match expectations.

Wednesday’s cut would have been a lot worse, and the biggest under Kuroda, if the BOJ hadn’t excluded the effect of the government’s plans to make education free for young children. That would have slashed its fiscal 2019 inflation projection to just 0.6 percent.

The central bank’s inflation forecast for fiscal 2016 started at 2.1 percent and was eventually revised down to minus 0.3 percent. Again, the BOJ blamed oil.

The danger from such an approach is that far from helping boost the impression that prices will rise among the public and companies, the BOJ reinforces the view that its estimates can largely be ignored.

Still, even the biggest forecast cuts of the Kuroda BOJ are smaller than the consecutive 1.1 percentage quarterly downgrades seen in the global financial crisis when Masaaki Shirakawa was at the helm of the central bank.