Business

Bank of Japan's price forecasts are headed for another crash with oil

by Toru Fujioka

Bloomberg

The sharp slide in oil prices threatens to halve Japan’s inflation rate over the next six months, while cheaper mobile phone bills and free nursery education could even push it below zero.

This view from private sector economists is very much at odds with the Bank of Japan’s forecast for its core inflation gauge to average 1.4 percent in the fiscal year starting in April. It also points to BOJ sticking with its monetary stimulus program for a longer period.

Citigroup Inc. economists Kiichi Murashima and Katsuhiko Aiba forecast that falling oil alone will push down core inflation, which excludes fresh food, to 0.5 percent by next June from about 1 percent now.

Oil has been the dominant factor for inflation recently because other items show little momentum, according to Taro Saito, director of economic research at the NLI Research Institute in Tokyo. It’s often been the case historically too, with Japan’s last experience of 2 percent inflation coinciding with a sharp rise in oil prices in the buildup to the global financial crisis.

The BOJ’s estimates, and those of the private economists, strip out the one-off impact from a consumption tax hike planned for October next year.

Saito at NLI Research Institute sees a chance of the gauge diving below zero as lower phone charges and free nursery schooling compound the deflationary momentum of oil.

Prime Minister Shinzo Abe’s administration has been badgering phone companies to lower their mobile phone charges, with Chief Cabinet Secretary Yoshihide Suga arguing that there is still scope for the charges to be 40 percent lower.

The government has pledged to provide free schooling for children ages 3 to 5 to help generate more public support for its tax increase. Many of the details of the free schooling have yet to be hammered out, making its impact less clear.

BOJ Gov. Haruhiko Kuroda has been here before when it comes to oil. He aggressively expanded the central bank’s stimulus in October 2014 amid a plunge in oil prices.

This time around though, increasing stimulus is a very difficult option because Kuroda’s policy is already squashing the bond market and crimping the profitability of commercial banks. Yet it will make it difficult to speed up tapering the program.

“The BOJ has learned that just doing more and more won’t get it closer to its target,” said Hiroshi Hanada, head of economic research at Sumitomo Mitsui Trust Bank. “Kuroda just needs to be very patient and he is good at that.”