The boj's new inflation forecasts do not reflect reality, which will spell trouble for them

　　The Bank of Japan (BoJ) should stop trying to curb market speculation about policy normalisation by offering inflation forecasts that do not reflect reality, according to a leading inflation expert at JPN.

　　Satoshi Watanabe, an economics professor at the University of Tokyo, said that while the central bank had sharply raised its price forecast last month, the figure was still too low.

　　In an interview with Bloomberg TV, he said: "The move may be due to fear of sparking speculation that the Bank of Japan will change its negative interest rate policy." But if you try to justify policy with predictions that aren't true, you'll be far from the right course of action. If you want to prevent these numbers from misleading the policy outlook, the right way to do it is to get the interpretation right."

　　"The BOJ's inflation forecast for this fiscal year in July should be as high as 2.9 percent, not 2.5 percent," he explained. That could lead to the central bank subsequently having to raise its inflation forecasts for the next two fiscal years above the bank's 2 per cent target. In this case, if monetary policy remains unchanged, the central bank will be in an awkward position." Economists in the latest Bloomberg survey put core inflation at 2.8 per cent this year.

　　In response to the Bank of Japan's sudden change to its yield curve control (YCC) last month, Governor Kazuo Ueda said the bank must be prepared for upside price risks. At the same time, it was largely welcomed by market participants as a measure to enhance market functioning, but Mr Watanabe said the bank should have scrapped it as a one-off. "YCC is now nothing but trouble," he said. All the BOJ does is adjust."

　　On the policy outlook, he said: "The annual spring wage negotiations starting later this year are extremely important and will likely determine whether Ueda can start raising rates during his term."

　　Instead, Mr Watanabe emphasised: "That is why it is crucial for the boj to provide correct inflation forecasts, as they are used as a reference in wage negotiations between unions and companies."

　　He further noted that "the smoothest course for the BOJ's policy adjustment is - signs of strong wage negotiations by the end of the year, allowing the bank to abandon the YCC; Then, with more signs of rising wages, the BOJ could announce a move to negative interest rates early next year. A prerequisite for raising short-term interest rates is the end of YCC. I am almost certain that the BOJ wants to remove it before raising rates."

　　According to some media reports, Watanabe has been mentioned as a potential candidate for central bank governor.