The Japanese economy is apparently gaining benefits from the lowest crude oil prices in about 12 years, but that is not the case with the Bank of Japan (BOJ), which is seeking to achieve a 2 percent inflation target to bail the country out of deflation.
At a monetary policy meeting scheduled for Jan. 28 and 29, the BOJ is going to carefully discern both the positive and negative effects of falling oil prices on the economy and commodity prices of the country as Japan is a major oil importer.
While the BOJ is seeking to achieve the inflation target sometime in the latter half of fiscal 2016, the central bank is wary of the possibility that low oil prices could reduce the expectations for price rises. Once consumers and the market widely share the view that prices won't go up, companies could be discouraged from raising retail prices and wages. Consumers could also procrastinate over purchases as they wait for prices to go down further. Such trends could foil the BOJ's goal of achieving a "virtuous cycle from income to spending."
The BOJ does not regard the falling oil price-induced downward pressure on commodity prices as a problem in itself, as cheap oil prices could boost the real economy through reduced cost burdens on businesses and households. If low oil prices can lead to spurring investments and consumption, that would ultimately push prices up.
The growth rate of the consumer price index (excluding perishable foods) has been hovering around zero since the spring of 2015, due in part to declining energy-related prices as a result of low oil prices.
In the meantime, the price index (excluding perishables and energy) rose 1.2 percent, prompting one BOJ official to say, "The inflation rate will rise toward 2 percent as the effect of falling oil prices fades away."
The BOJ's plan to achieve the 2 percent inflation goal around late fiscal 2016 is premised on crude oil prices rising to upwards of 60 dollars per barrel in fiscal 2017 from 50 dollars. As market observers widely share the view that oil prices will remain low over a long period of time, "If oil prices stay at 35 dollars per barrel, commodity prices will be held down by 0.4 points in fiscal 2016," said Koya Miyamae, senior economist at SMBC Nikko Securities Inc.
Tsuyoshi Ueno, senior economist at NLI Research Institute, said, "If the slowing of economies in emerging countries and resource-rich nations progresses, and the strong yen and low share prices are to continue, the BOJ is likely to expand monetary easing."