Corporate Japan expects inflation to slip

Inflation expectations among Japanese companies have weakened slightly, according to one of the Bank of Japan's favourite economic indicators - but it may not be enough to trigger further monetary easing in April, analysts say.

The tankan survey of inflation expectations, a new indicator the BoJ created to keep tabs on its war against deflation, shows business expectations for price rises in five years' time falling slightly from 1.7 per cent to 1.6 per cent.

BoJ officials place great weight on inflation expectations as the main engine of the massive monetary stimulus they began two years ago. Weakness in these expectations was the chief reason they expanded "qualitative and quantitative easing" last October.

"Raising inflation expectations is both an objective of QQE and, at the same time, the key to implementing the QQE transmission mechanism to overcome deflation," said BoJ governor Haruhiko Kuroda in a recent speech.

The BoJ's tankan is a huge quarterly survey of business sentiment. A question about inflation expectations was added last year. Overall inflation expectations in the March survey held steady at 1.4 per cent one year ahead and 1.6 per cent three years ahead, but dipped for manufacturers in particular.

Looking at the prices of their own products, companies' inflation expectations dropped slightly to 0.9 per cent one year ahead, but rose to 2.2 per cent in five years' time.

The BoJ thinks these expectations are much more important than the current inflation level, which fell to zero in February because of falling oil prices.

Expected inflation should guide wage and price-setting and so become a self-fulfilling prophecy. The BoJ therefore needs to keep expectations in line with its 2 per cent inflation objective.

Japan's central bank began its stimulus in April 2013 as part of Prime Minister Shinzo Abe's programme of Abenomics. It promised to double the country's monetary base, and then shocked financial markets last October by accelerating the rate of purchases of government bonds to Y80tn a year.

The economy fell into recession last year after a 3 percentage point rise in sales tax. It has bounced back slowly, with sluggish growth in consumption and business investment despite the spur of a weak yen.

BoJ officials expect a solid round of wage increases this spring, however, and a more robust economic recovery in the second half of the year. Given that, the slight fall in inflation expectations may not trigger further easing straight away.

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