The Bank of Japan could reach its 1 percent inflation goal in two years as brighter growth prospects spur prices, the central bank's top economist indicated.

"Growth in prices will be closer to the 1 percent inflation goal at or after the end of fiscal 2013 unless the economy gets thrown off course," Eiji Maeda, 50, the BOJ's chief economist, said in an interview in Tokyo yesterday, referring to the year ending March 2014. "In the long term, there are signs that the tide is turning in price trends."

The remarks signaling that the target could be met in the year starting April 2014 are the strongest yet from the central bank, which last month forecast prices would increase 0.7 percent in fiscal 2013. BOJ Governor Masaaki Shirakawa has pledged "powerful" monetary easing until the goal is in sight and has already added stimulus twice this year.

Companies have improved Japan's growth outlook by targeting an aging population, which could spur demand and help lift prices, Maeda said. Higher labor costs in countries like China,Japan's largest trading partner, have reduced pressure on Japanese firms to lower prices, which has also helped ease deflation in Japan, he said.

David Fuller's view Central banks have not exactly distinguished themselves in the realm of inflation forecasts in recent years, although the errors have mainly been underestimates of inflation, not least by the Bank of England.

Japan has been different, remaining mired in deflation to the considerable angst of the ruling National Diet of Japan, not to mention long-suffering corporate exporters who have seen their profit margins eroded by the yen's strength. I last wrote about this in my lead item and review on 1st May 2012, pointing out once again that Bank of Japan Governor Masaaki Shirakawa seemed determined to preserve purchasing power for Japan's increasingly elderly savers. While laudable, this was not helping the economy and stock market to recover. Therefore I take the BoJ's latest forecast above with a proverbial grain of salt, although I hope it proves to be accurate.


Two weeks can be a long time in stock markets so what can we say about Japan's indices today?

Unfortunately, we are still Waiting for Godot in terms of a sustainable stock market recovery. However, with indices falling back towards the lower side of their lengthy ranges, a trading opportunity is approaching.

Commencing with what Fullermoney has long regarded as the lead indicators, Japan's Topix Banks Index (weekly & daily) is becoming quite overextended as it falls back into its trough established between September and December of last year. Watch for the Index to lose downward momentum as some support is encountered near last year's lows. If they hold we should eventually see some strong upward dynamics as occurred in January. That would signal the onset of a recovery rally.

The Topix 2nd Section Index (weekly & daily) is another lead indicator. Having failed to maintain its upward break in March, this Index lost upside momentum and is now accelerating lower. This action is becoming climactic and we should watch for eventual evidence of the next reversal sometime after support is encountered between current levels and 2000. Caution - we may see a penultimate low, as so often occurs, before a more sustainable low is established. You can see that following last August's downward acceleration.

Japan's Nikkei 225 Index (weekly & daily) is also slumping towards last year's lows which should begin to slow downside momentum as they are more nearly approached. Thereafter, I would want to see an upside lead from the Banks and 2nd Section Indices before assuming that NKY could sustain a meaningful rally.

Lastly, all upside bets for Japanese stock market indices are postponed if JPY/USD (weekly & daily) continues to strengthen. However, it is currently testing the underside of its MA and if the BoJ can be strong-armed into weakening the yen once again, sentiment towards Japan's exporters would improve. Additionally, I would not expect Japanese equities to stage a meaningful rally without some firming in JBG 10-year yields (weekly & daily) which look overextended having fallen back to their October 2010 lows.