The Bank of Japan is considering cutting its inflation outlook for fiscal 2016 due to plunging crude oil prices, sources close to the central bank said Wednesday. The comments may fuel speculation that additional monetary easing is on the cards.
As the pace of decline in crude oil prices has been faster than the BOJ assumed, the central bank could again extend its forecast for when its 2 percent inflation target will be achieved. In October it projected that happening around the latter half of fiscal 2016.
At its next policy meeting on Jan. 28 and Jan. 29, the BOJ is likely to revise down its inflation outlook to around 1 percent for fiscal 2016, as oil prices are expected to remain sluggish for a prolonged time, the sources said.
In October, the BOJ said it expects the core consumer price index, which excludes fresh foods, to rise 0.1 percent in fiscal 2015 and by 1.4 percent in fiscal 2016 on the back of a moderate rise in crude oil prices from $50 per barrel.
On Tuesday, the benchmark futures contract in New York dropped below $30 per barrel, weighed down by oversupply and a slowing Chinese economy.
By cutting its forecast, the BOJ will need to extend for a third time its time frame for achieving its inflation goal, prolonging the struggle of the world's third-largest economy to overcome deflation.
Speculation about further monetary easing receded after the BOJ decided in December to expand the scope of its asset purchase program. But plunging stock prices and a firming yen have stirred expectations among market participants for additional steps.
"The trend of a weakening yen that has supported corporate earnings is starting to reverse," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co.
"The BOJ needs to move swiftly in order to put the brakes on the yen's appreciation," Kodama said.