Japan’s inflation expectations: glass half empty?

“Inflation expectations appear to be rising on the whole.”

Check out the last 11 policy statements from the Bank of Japan: you’ll find the same line, an upgrade from a milder assertion about “some indicators” last July.

But according to the second round of the BoJ’s survey of companies’ expectations for price rises – the grand-sounding “inflation outlook of enterprises”, published on Wednesday – expectations are not rising. If anything, they’re falling.

This was not supposed to happen. The BoJ had been hoping that the survey would serve as a policy tool, supporting the self-reinforcing mechanism at the heart of Kurodanomics: the more companies think prices will rise, the more they’ll put up prices.

But the first time the survey was taken, in March, companies said that consumer prices would be rising at an average 1.5 per cent one year ahead. In the June survey, the figure is the same. Ditto with the five-year inflation outlook, which has stood still at 1.7 per cent. For the three-year outlook, the projection is actually lower, slipping to 1.6 per cent from 1.7 per cent.

When it comes to their own output prices, the picture is a little more bullish. The five-year projection for large non-manufacturers, for example, has risen from a 1.5 per cent increase in March to a 1.8 per cent increase now.

But for general market prices, there is a strong consensus. Large companies, small companies, manufacturers, non-manufacturers: their inflation expectations are not rising.

Granted, Japan Inc is in pretty good shape. Even though optimism has dipped after the tax hike, headline readings in the latest Tankan survey – published on Monday – were still positive, indicating that optimists outnumber pessimists. Investment in fixed assets could come roaring back soon, if big companies stick to their plans to spend more than 7 per cent more this year, than last. (They sketched out similar targets at the same stage last year, before paring back the annual rise in capex to 2.5 per cent).

And perhaps it is not surprising that respondents see muted inflation ahead, when the governor himself said last week that the CPI could dip as low as “around 1 per cent” over the summer, from 1.5 per cent now, before resuming its upward progress.

The fact that companies see any inflation at all in five years could be considered a triumph, given the past decade and a half of mild but persistent deflation.

But still, what the survey suggests is that there are big doubts among companies over whether Japan’s 2 per cent target is achievable.

For the BoJ, which says it is straining every sinew in pursuit of its target, this is a problem.