2014.06.2502:34:09UTC+00Japan inflation to drop but BoJ stays on track of policy

The Bank of Japan (BoJ) is undeterred by forecasts that inflation in the east Asian country will get worse and sink further before reaching its target.

Governor Haruhiko Kuroda himself believes that Japan’s inflation rate, which stands at 1.5% today, could fall to a low of 1% over the incoming summer season. This possibility, however, is not enough to drive the central bank to away from their previous comments that they will not adopt additional aggressive policies anytime soon.

In front of members from one of Japan’s most influential business associations, Kuroda shared his belief that core consumer prices in the country will go through a slowdown in price increases, but should head back up again starting October until it reaches their target of 2%. Major factors playing roles in this scenario include aggressive private sector pricing supported by a growth in wages.

So far, despite surprises along the way, the governor has not strayed away from the bank’s original plan laid out in April last year to fend of low inflation that included doubling the money available to Japan. To achieve this, the BoJ has mostly resorted to asset purchases in the form of long term bonds in the sovereign debt market.

A key obstacle to which Kuroda alluded to multiple times in his speech was the slow increase in employee wages. A steady climb in wages could provide invaluable support in spurring the confidence of consumers to make more transactions in the market and push inflation higher. However, to date, there has been no pay increases driving household incomes to drop by 7.1% in April instead.

Additional data is expected out this Friday which analysts say will show that the consumer price index dropped from 1.5% to 1.4%, excluding tax.