The Bank of Japan now sees a much bigger possibility of inflation slipping below 1%, pushed down by falling crude oil prices, according to people familiar with the central bank’s thinking, a development that could rekindle market speculation for additional easing.
While the BOJ recognizes that lower oil prices are ultimately good for the economy as they reduce living costs from imported food to gasoline, the central bank is concerned about their effect over the shorter term.
Viewed from the perspective of the bank’s goal to achieve stable inflation of 2% in about two years, the lower crude prices will likely outweigh recent falls in the yen, slowing down the BOJ’s mission to rid Japan of deflation.
A fall below 1% is now “possible,” said one of the people. Another person cited a “fifty-fifty” chance. The people also signaled that inflation could stay below 1% for more than one month, though one of them said sustained declines after October were unlikely.
Only a few months ago, a drop in price growth below 1% was seen by some economists as a trigger for the BOJ to consider extra stimulus, though the falls in the yen since then largely doused out speculation of imminent easing.
Still, financial markets are closely watching how the consumer price index fares over the coming months to gauge the possibility of whether the central bank will act again. The index, factoring out the effects of an increase in the sales tax in April and volatile perishable food prices, rose 1.1% in August, below its recent peak of 1.5% in April.
Crude oil prices have fallen by more than $20 per barrel over the past few months. The Dubai oil price, the benchmark oil transaction in Asia, fell $3 on Thursday to $82.30 per barrel.
The BOJ sees a $10 drop in crude oil prices weighing on CPI growth by at least 0.1 percentage point, the first person said.
If the recent decline in oil prices is sign of a further slowdown in the global economy, that’s also not good for the Japanese economy just as recent signs point to a pick-up in exports, the people said.
The BOJ is also concerned about the protracted impact of a continued fall in crude oil prices on inflation expectations, something the bank sees as key to eradicating years of deflation, the people said.
Board member Sayuri Shirai argued in a monthly magazine Thursday that various data suggest Japan’s long-term inflation expectations are hovering around 1% compared with around 2% in the U.S. and U.K. For the BOJ to achieve a stable 2% inflation target, those expectations needs to be stabilized at the same level, she said.
Ms. Shirai dissented on the policy board’s view at the previous meeting that inflation expectations appear to be rising on the whole.
Many BOJ watchers don’t expect the central bank to take additional stimulus when the policy board meets on Oct. 31. CPI data for September comes out the same day, with the central bank also slated to release its semi-annual forecasts on prices and growth over a three-year time frame.