Japan inflation barometer points to zero price growth by summer

[TOKYO] The inflation outlook is looking dismal for the Bank of Japan as cheaper oil and falling mobile phone charges threaten to push price growth toward zero by mid-summer.

The Bloomberg Inflation Barometer, which draws on eight drivers of prices, points to a sharp slowing in the months ahead as lower oil costs feed their way into electricity bills. Over the past eight years the barometer has shown a 0.84 correlation with consumer prices six months into the future.

Mobile phone carriers could complicate the BOJ's quest to revive inflation as they come under political pressure to lower charges further. And making matters worse, free education measures planned by the government are already projected by the BOJ to shave another 0.3 percentage point from inflation later in the year.

Flat-lining of prices would heap pressure on the central bank to take action or justify its decision not to. Any softening in the yen, further wage gains or jump in oil prices could still help the BOJ stick to its view that temporary factors don't warrant an immediate response.

The BOJ is trying to generate 2 per cent inflation and has pledged to continue its stimulus programme until its goal is achieved.

The central bank has already slashed its inflation forecasts for the fiscal year starting in April to 0.9 per cent from 1.4 per cent. But even this forecast looks overly optimistic.

While Japan's three biggest mobile phone carriers say they have already lowered prices by at least 30 per cent in the last year, the government has called for reductions of 40 per cent, an outcome that could shave 0.9 percentage point off overall price growth.

BLOOMBERG