BOJ won't blink even if oil triggers cuts to CPI forecasts: sources

[TOKYO] Renewed declines in oil prices may force the Bank of Japan to again slash its inflation forecasts in January, but such downgrades would not lead to an immediate expansion of monetary stimulus, people familiar with the central bank's thinking say.

The BOJ cut its price forecasts in October and pushed back the timeframe in which it expects inflation to hit its 2 per cent target by six months, blaming the delay largely on slumping energy costs.

The forecasts were based on the assumption that crude oil prices, which were around US$50 per barrel back then, will gradually rise to around US$60 in coming years.

But oil prices have slid below US$40 and unless they bounce back significantly, the BOJ is likely to cut its oil assumption and consumer price forecasts when it next reviews its long-term forecasts at a rate review on Jan 28-29, the sources said on condition of anonymity.

"If oil prices hover around current levels, a revision to the BOJ's price forecasts is unavoidable," said one source.

The BOJ's current forecast, made in October, is for core consumer inflation - which excludes volatile fresh food but includes oil costs - to hit 0.1 per cent in the current fiscal year to March 2016, and accelerate to 1.4 per cent next year.

The bank now expects inflation to hit its 2 per cent target by early 2017, though pessimists in the BOJ board have publicly said it may take longer given slow wage growth.

BOJ Governor Haruhiko Kuroda insists the bank will look through the effect of oil price falls and ease only if risks, such as the slowdown in emerging economies, disrupt a broad uptrend in prices and discourages firms from raising wages.

A cut in the BOJ's inflation forecasts alone is thus unlikely to trigger immediate monetary easing, particularly since low energy costs offer a windfall to an oil-importing country like Japan, the sources say.

The BOJ has argued that the underlying trend of inflation is improving, as companies are gradually raising wages and prices of their goods reflecting improvements in the economy.

To back up this view, the BOJ points to a new price indicator that strips away the effect of energy and fresh food costs but includes processed food prices, which are rising.

That index showed consumer prices rose 1.2 per cent in the year to October, and BOJ officials expect it to accelerate further until around February next year.

BOJ officials are thus likely to focus more on the new index to make their case that Japan's economy is on track to achieve the bank's price target.

The BOJ currently uses the government's core CPI, which excludes fresh food but includes energy costs, as its key price measurement in guiding policy. That index fell 0.1 per cent in the year to October, sliding for the third straight month.



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