The Bank of Japan (BOJ) expects inflation to rise to an average 0.7 percent in the current 2013 fiscal year and then accelerate to 3.4 percent in the next fiscal year, which begins April 1, 2014, easily exceeding the central bank's new 2.0 percent price stability target.
For the following year, fiscal 2015, inflation is forecast to ease slightly to 2.6 percent, according to the BOJ's latest economic outlook. In the 2012 fiscal year, that ended March 31, consumer prices excluding fresh food, dropped 0.2 percent.
"Comparing the current projection for the period through fiscal 2014 with that in the January 2013 interim assessment, the projected rates of change in the CPI are higher," the BOJ said.
In January the median forecast of a majority of the BOJ's board members was for inflation to rise to 0.4 percent in the current fiscal year and then to 2.9 percent in fiscal 2014.
The BOJ's launch of a new, more aggressive phase of monetary easing last month has lead to fall in the value of the yen and thus improved the international competitiveness of Japanese exporters.
Japan's Gross Domestic Product is now forecast to expand by 2.9 percent in the current 2013 fiscal year, up from 1.0 percent in fiscal 2012, as consumers front-load spending ahead of planned tax hikes.
Growth is then forecast to ease to 1.4 percent in fiscal 2014 before rebounding the following fiscal year and expand by 1.6 percent.
The forecast is based on the assumption of stable global financial markets, a moderate rise in the growth of overseas economies and higher exports due to the yen's depreciation.
"Comparing the current projection for the period through fiscal 2014 with that in January 2013 interim assessment, the growth rates are expected to be higher than the ones presented in January, mainly due to the introduction of quantitative and qualitative monetary easing, and improvement in financial market conditions, and an increase in public investment," the BOJ said.
The inflation and growth forecasts take into account planned tax increases in April 2014 and fiscal 2015.
Excluding the effect of the consumption tax hikes, inflation is forecast to hit 1.4 percent in fiscal 2014, up from January's forecast of 0.9 percent, and then rise to 1.9 percent in fiscal 2015.
The economic outlook repeated last month's statement from the BOJ that Japan's economy had stopped weakening and was showing signs of picking up.
"Looking ahead, it is expected to return to a moderate recovery path around mid-2013, mainly against the background that domestic demand remains resilient due to the effects of monetary easing as well as economic measures, and that growth rates of overseas economies gradually pick up," the BOJ said in its latest forecast.
Two scheduled consumption tax hikes in 2014 and 2015 will hit demand but the BOJ expects growth in fiscal 2013 to continue to grow at a pace above its potential, "as a trend, as a virtuous cycle among production, income and spending is maintained," the BOJ said, adding the country's potential growth rate is estimated at an average of around 0.5 percent during the forecast period, with the rate growing gradually toward the end of fiscal 2015.
The BOJ said upside and downside risks to its forecast for economic activity were seen as balanced, although there is high uncertainty regarding growth in overseas economies.
The risk to the its inflation forecast is also judged to be balanced, "although considerable uncertainty surrounds developments in medium- to long-term inflation expectations," the BOJ said, acknowledging that it faces an major challenge in shifting the expectations of consumers and businesses after almost 15 years of deflation.
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