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Abe's free education plan may slow Bank of Japan's inflation drive

[TOKYO] Prime Minister Shinzo Abe's campaign pledge to expand free education may come with an unintended consequence: a hit to the Bank of Japan's (BOJ) efforts to spur inflation.

Economists from Barclays Securities Japan Ltd to Nomura Holdings Inc and IHS Global KK see the likelihood of a significant - though probably temporary - drag on the BOJ's benchmark consumer price index.

"There's no doubt that it will put downward pressure on core CPI (consumer price index)," said Harumi Taguchi, principal economist at IHS in Tokyo. "The year that education costs are brought down, it will definitely have an effect. The impact should last at least for that year," she said.

Potential cuts to fees could shave up to 0.7 percentage point from core CPI, according to projections by Barclays. Nomura estimates a negative impact of as much as 0.5 percentage point for their projection of free education.

Yet much is uncertain. First, Mr Abe's ruling party and his coalition partner have to win the Oct 22 election, then hash out the details of the plan and when it should begin.

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Adding to the complexity, the prime minister has earmarked revenue from a scheduled increase in the sales tax in 2019 to fund free education. The last hike in the levy spurred a surge in inflation, followed by a sharp contraction in spending and prices.

"Depending on the results of the election and how policies are structured afterwards, free education's effects on core CPI could be anywhere from zero to over one per cent," said Bloomberg Intelligence economist Yuki Masujima.

Not everyone is so pessimistic. SMBC Nikko Securities Inc economists led by Yoshimasa Maruyama note the possible impact from free education, but emphasise it as temporary and something to look past.

It also has to be remembered that expanding free education could be a significant financial benefit for young families, and this is important amid efforts to lift the birth rate and stem Japan's demographic decline.

Still, it could pose a challenge to the BOJ, which has made progress in inflation over recent months but is still well short of its price goal, despite more than four years of unprecedented monetary stimulus.

Nomura estimates that expanding free education could halve the inflationary pressures from raising the sales tax by two percentage points to 10 per cent.

Barclays also points to 2010, when the Democratic Party government of the time cut some high school fees, weighing on core CPI.

"Further downward pressure on Japan's already sluggish CPI inflation due to the elimination of education fees could force the BOJ to sharply lower its CPI inflation outlook," Barclays economists led by Yuichiro Nagai wrote in a report dated Sept 26.

Depending on the timing of the move, it could even push back the eventual normalisation of monetary policy, they said.


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