BoJ sees oil adding risk to inflation targets

The plunge in the price of oil makes it increasingly uncertain whether the Bank of Japan will reach its 2 percent inflation target in the coming fiscal year, according to people familiar with the central bank's discussions.

The BoJ is considering cutting its price forecast for the year that starts in April, according to the people, who asked not to be identified because the talks are private. The BoJ is also mulling raising its growth outlook for the same period, the people said. The central bank isn't currently inclined to expand already-record easing at a meeting next week, reflecting its view that the economy remains in a virtuous cycle and inflation expectations are steady, the people said. Last month, people familiar with the matter said that while cheaper energy costs may weigh on consumer prices for a time, they ultimately will boost the economy -- spurring inflation. "It will probably be difficult to achieve the 2 percent inflation goal within the next fiscal year," Economy Minister Akira Amari said yesterday, citing the government's own inflation forecast of 1.4 percent for next fiscal year. The BoJ is expected to cut its core consumer inflation forecast for next fiscal year to 1.5 percent or lower, media reported.

Consumer prices, excluding fresh food and stripped of the impact of an April 2014 sales- tax increase, rose 0.7 percent in November from a year before, government data show. BoJ Governor Haruhiko Kuroda is in his second year of leading an unprecedented effort to root out deflation, which was entrenched in Japan's economy for about 15 years. The Topix index of shares fell 0.9 percent at the morning close in Tokyo, as the yen traded near a four-week high against the dollar. The Japanese currency rose 0.4 percent to 117.49 per dollar at 11:32 a.m. The BoJ unexpectedly boosted stimulus in October, seeking to stamp out a "deflationary mindset" that was reinforced by the plunge in oil, which dropped below $45 a barrel in New York this week.

Takeshi Minami, an economist at Norinchukin Research Institute, said the central bank is unlikely to expand stimulus when the policy board meets next week. Further out in the year, some analysts predict the BoJ will need to add to its stimulus efforts yet again. "The BoJ will monitor the impact of the falling oil price and rising wages on domestic demand growth for the time being, but we think it will ease once more in the latter half of 2015," Daiju Aoki, an economist at UBS AG in Tokyo, wrote in a note to clients on Jan. 8.

The median forecast of the BoJ's nine board members was for consumer prices excluding fresh food and the effects of sales-tax increases to rise 1.7 percent next fiscal year, according to its latest outlook report on Oct. 31. Price gains were likely to be near the current level "for the time being" and to accelerate gradually and reach about 2 percent in or around next fiscal year, Kuroda said at a press conference on Dec. 19.

Kuroda is counting on a narrowing gap in supply and demand in the economy combined with expectations that prices will rise to drive inflation upward.

Companies across all industries predicted the same rate of inflation in three years and five years as they did three months earlier, according to the BoJ's Tankan survey on Dec. 16.

A separate BoJ survey released last week showed households saw the same pace of consumer price gains one year and five years ahead as they did three months ago. The BoJ isn't the only central bank struggling against low inflation from falling oil prices. U.K. inflation cooled to 0.5 percent in December, matching a record low. The European Central Bank is considering new stimulus, including government bond purchases, after prices fell an annual 0.2 percent last month, the first decline in five years. "The BoJ will judge a slowdown in consumer prices caused by cheaper oil prices to be temporary," said Mari Iwashita, an economist at SMBC Friend Securities Co.

Iwashita predicts Japan's core consumer prices will fall 0.1 percent in April from a year earlier. That is unlikely to prompt any immediate extra stimulus from the BOJ, which will probably explain it won't ease further to counter a temporary setback while pointing out that wage growth and cheaper oil will support the economy, she said.