Japan firms doubt BOJ price targets, new stimulus seen

TOKYO, Apr 2 (Reuters):  Corporate Japan expects the consumer price index to be just 1.5 per cent higher in a year from now, a Bank of Japan tankan survey found on Wednesday-a sign of how difficult the central bank could find meeting its 2 per cent inflation goal by the April 2015 target date.

The survey outcome overlays Tuesday's tankan findings that Japan's fragile business sentiment barely improved in the three months ending March, and the corporate outlook is now considerably weaker than when Japan raised its sales tax in 1997, the last hike before Tuesday's increase to 8 per cent from 5 per cent.

The findings stem from a BOJ decision to poll companies' inflation expectations, starting with its March tankan survey, to give central bankers more information to guide monetary policy.

Besides a forecast for just 1.5 per cent consumer price inflation in a year, the survey also showed that firms expect consumer prices to be rising by a modest 1.7 per cent three years

and also five years from now, suggesting the BOJ's two-year plan for guiding consumer prices to 2 per cent is overly ambitious and may require additional measures.

The BOJ has kept monetary policy steady since deploying an intense burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate consumer inflation to 2 per cent in two years, but speculation could increase that the BOJ will have to ease policy further.

"It is a little painful for the BOJ that the numbers did not come closer to 2 per cent," said Shuji Tonouchi, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"The BOJ may have to be more flexible with the time element of its price target. We expect the BOJ to ease policy again in the second half of the year."

A separate BOJ survey released on Wednesday showed that Japanese households also aren't fully convinced that inflation will accelerate in coming years.

Of the households polled by the central bank, 69.3 per cent said they felt prices have risen compared with a year ago, up from 67 per cent in the previous survey three months ago.

But the ratio of households who expect prices to rise a year from now fell to 79.9 per cent from 80.9 per cent, with 15.6 per cent saying they expect prices to remain largely unchanged, according to the survey conducted from February 6 to March 4.

The new data on corporate price expectations showed that consumer prices are expected to rise gradually, which could be discouraging for some central bankers.

The survey also showed that companies expect the prices they will charge for their goods will be rising an average 1.1 per cent one year from now, 1.8 per cent three years from now, and 2.1 per cent five years from now.

The survey showed that large manufacturers expect the prices for their goods to be only 0.2 per cent higher a year from now, while small manufacturers expect these prices to be 1.2 per cent higher one year from now.

The difference is because many large manufacturers expect prices overseas will remain flat, while small manufacturers' expectations are based more on the outlook for domestic demand, fixed-income strategist Tonouchi said.

Growing expectations that the BOJ will ease policy further, in addition to bullish data on the US manufacturing sector, helped lift Japanese shares .N225 to a three-week high on Wednesday.