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The Bank of Japan trimmed its consumer price forecasts on Thursday and pushed back the timeframe to hit its ambitious inflation target but refrained from expanding its already massive stimulus programme, predicting a recovering economy will gradually nudge prices higher.
Inflation is now expected to hit the 2% target around the half year from April to September 2016, the BOJ predicted, watering down the forecast that the target would be met around the current fiscal year, which began this month.
Consumer prices are likely to be flat "for the time being and, as the underlying trend in inflation steadily rises and the effects of the decline in crude oil prices dissipate, accelerate toward 2% - the price stability target," the central bank said in its semiannual report on the economic and price outlook.
Economists had long been sceptical that the BOJ would meet its target within its original timeframe, and the collapse of world oil prices last year had put it even further out of reach.
As expected, the central bank also maintained its huge asset buying programme on hopes that rising wages will spur spending and eventually nudge inflation higher. It will keep increasing base money at an annual pace of 80 trillion yen ($700 billion) through purchases of government bonds and risky assets.
With inflation having ground to a halt due to slumping oil prices, the BOJ's nine-member policy board cut its core consumer inflation forecast for this fiscal year to 0.8% from 1.0%, in line with expectations.
As CPI is likely to stay around zero, this could affect the pace of increase in inflation expectations, the bank said.
Still, many analysts expect the BOJ to ease policy later this year as inflation slides further away from its ambitious target.
"We believe the central bank will announce enhanced easing measures by the end of the second quarter, most likely at the June 19 policy meeting," HSBC economist Izumi Devalier said in a research note.
Japan is emerging from recession but at a snail's pace, as companies remain wary of ramping up spending despite record profits and consumers keep their purse strings tight.
Despite a raft of weak data so far this year, the government appears to be in no mood to pressure the BOJ to do more at this time. Japan's vice economy minister said recently it would "not be a big deal" if the timing for hitting 2% inflation is delayed by oil price falls.
Aides close to premier Shinzo Abe have said further monetary easing could trigger unwelcome falls in the yen that would boost import costs, offsetting the benefits consumers and small firms are enjoying from the falling cost of fuel.
BOJ Governor Haruhiko Kuroda has also voiced confidence his massive stimulus programme was succeeding in cracking the "deflationary mindset" that haunted Japan for 15 years.
The BOJ surprised markets last October by expanding its asset purchase programme after cutting its forecasts, days after Kuroda had assured parliament that a recovery was on track.
Central bankers have stressed since then that they will look through the effect of lower oil costs, which are largely blamed for inflation evaporating in February.
But consumption has failed to rebound, underscoring doubts held by analysts that inflation will accelerate as quickly as the BOJ projects.
Even after trimming its forecasts, the BOJ remains more bullish than the broader market. Analysts polled by Reuters expect core consumer inflation to hit 0.3% this fiscal year and 1.3% the following year, barely half the pace projected by the BOJ.
($1 = 118.7800 yen)
