Japan is unlikely to escape from deflation at least through the fiscal year ending in March 2013, prompting the Bank of Japan to stick to its ultra-loose policy, Kazumasa Iwata, former deputy governor of the central bank, said on Wednesday.
Iwata added that a planned change of the base year for Japan's consumer price index (CPI) in August is likely to push the CPI down by 0.5 percentage point and reinforce market expectations that the BOJ's zero rate policy will remain in place for a long time.
The BOJ has pledged to keep interest rates effectively at zero until price stability, which it views as consumer inflation around 1 percent, is in sight.
Consumer inflation of 1 percent will look even further off after the CPI rebasing. It is almost impossible to foresee a CPI rise to that level, Iwata told Reuters in an interview.
The BOJ expects Japan to achieve core consumer inflation of 0.3 percent in the year beginning in April and 0.6 percent in the following year but the forecasts exclude effects of the CPI index base change, meaning they are likely to be revised down later this year.
Iwata said the bank's CPI projections are hard to understand because they do not reflect a wide output gap, or the difference between potential output and actual output, in Japan.
It would require additional steps from both the government and the BOJ to achieve consumer inflation of 1 percent.
Iwata was considered a policy dove when he served on the BOJ policy board from 2003 to 2008. He is now president of the Japan Center for Economic Research, a government affiliate.
The BOJ last month nudged up its price forecast for the fiscal year starting in April, reflecting higher commodity prices, and forecast an early escape from Japan's economic doldrums, further dampening any expectations of imminent monetary easing.
The U.S. Federal Reserve is in a similar situation to the BOJ as they both fall short of their price stability mandates and will need to keep their policies loose, even as the European Central Bank leans toward tightening to combat inflation, Iwata said.
He said that recent commodity price rises threaten to hurt the global economy by squeezing corporate profits and people's incomes, but there will likely be a considerable lag before food prices in Japan start rising. (Editing by Edmund Klamann and Joseph Radford)