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Amid weak inflation, BOJ running out of options

Bank of Japan Gov. Haruhiko Kuroda speaks at a press conference at the central bank's headquarters in Tokyo, on July 31, 2018, following a two-day meeting of its Policy Board. (Kyodo)

TOKYO (Kyodo) -- Chronically weak price gains pushed the Bank of Japan to fine-tune its monetary stimulus on Tuesday, but it appears to be fast running out of tools to achieve its 2 percent inflation target.

Analysts say the central bank has little choice but to sit back and pray for inflation to gain momentum, with little room for additional easing measures.

Back in April 2013 when the BOJ -- led by then newly-appointed Governor Haruhiko Kuroda -- adopted an unprecedented money-printing program aimed at jumpstarting the country's stagnant economy, it promised to hit the inflation target in around two years.

More than five years later, the core consumer price index, which excludes volatile fresh food prices, is still hovering below 1 percent. In its latest projections, the central bank said it does not expect the 2 percent goal to be achieved until at least fiscal 2021.

The BOJ conceded Tuesday that prices were rising at a slower pace than expected, mainly because wage growth remains low and a "deflationary mindset" pervades the public after years of falling prices.

But Kuroda remained upbeat that prices would eventually pick up, saying, "If the output gap continues to stay positive, inflation will definitely climb toward 2 percent."

In an attempt to show its commitment, the central bank added a pledge to "maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties...including the effects of the consumption tax hike scheduled to take place in October 2019."

Norio Miyagawa, an economist at Mizuho Securities Co., said the guidance was successful in tamping down market speculation that the BOJ was effectively following the U.S. and European central banks in moving to normalize policy.

"There was a risk that it would be taken as tapering, but they were able to more-or-less prevent that," he said.

But Miyagawa added that going forward, there is little action the Japanese central bank can take.

"Even if additional easing measures were on the table, there would be side effects. You could say they're at a deadlock. There's nothing they can do that would have an immediate effect" to lift inflation, he said.

The latest policy changes -- the first since the BOJ shifted its focus from monetary base expansion to controlling the yield curve in September 2016 -- were meant to mitigate such adverse effects, namely its own government bond purchases soaking up liquidity and hampering trading on the market.

But Takahide Kiuchi, a former member of the central bank's Policy Board, said there were doubts over whether the changes, which included allowing long-term interest rates to climb slightly, would help improve the sustainability of stimulus.

The move may lead to expectations that the BOJ will allow an even larger rise in the benchmark 10-year government bond yield and "the BOJ risks being unable to contain the 10-year yield," Kiuchi said in a report.

"The BOJ is in a precarious position. I think the latest policy change is a sign that (yield curve control) has started collapsing," he said.

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