REPEAT: MNI: BOJ Concern Over Crude Oil Price Impact in 2019

Repeats Story Initially Transmitted at 06:15 GMT Dec 10/01:15 EST Dec 10

--Follow-Through Of Lower Crude Prices In Infla Expectations A Worry

By Hiroshi Inoue

     TOKYO (MNI) - The recent fall in crude prices will put downward pressure on

consumer prices and Bank of Japan officials will pay close attention in the

months ahead, with some concern as to how that impacts medium and long-term

inflation expectations, MNI understands.

     The officials don't see as big an impact as that seen in 2016 after the

crude falls experienced in 2015, although some follow-through into expectations

is expected.

     --WEAKER CPI WORRY

     Despite the shallower fall in crude, BOJ officials are concerned that

upward pressure on inflation will weaken in 2019, as firms' caution over wage-

and price-setting, along with households' unease over higher prices remains

embedded.

     "Upward pressure on short-term inflation expectations is expected to rise

in 2019 with the consumption tax hike scheduled in October 2019 approaching. But

medium- to long-term inflation expectations (on which the BOJ is more focused)

will be influenced by the expected drop in consumer prices," a person who is

familiar with BOJ thinking told MNI.

     --PAST INFLATION IMPACT

     WTI crude futures recently traded at around $52.50, down from the October

high of $76.00. In 2015, WTI crude oil futures fell to around $30 from highs of

$100.

     In 2015, BOJ economists, along with private-sector economists, had expected

the drop in crude oil price to have boosted economic activity and then push up

consumer prices.

     They had expected the improvement in the term of trade caused by the drop

in crude prices to have increased corporate profits and boosted economic

activity, whilst boosting household real income and increasing consumer

spending. 

     However, firms didn't increased wages and households didn't increased their

spending. Instead, weaker oil prices depressed core consumer price index

excluding fresh food, with core CPI falling 0.3% on year in 2016 after a 0.5%

gain in 2015 and a 2.6% gain in 2014. 

     --THREE MAJOR FACTORS

     For the BOJ, the output gap, tightness in labor market conditions and

inflation expectations are the major elements of affecting the current momentum

toward hitting the 2% price target, MNI was told.

     The BOJ still believes it is important to maintain a positive output gap --

a driver for higher inflation -- for as long as possible, and the mechanism

whereby an improvement in the output gap leads to a rise in inflation is still

operating.

     However, should the output gap shrink on the back of slow economic growth

and tightness in the labor market reverses, BOJ economists will be concerned

about a weakening of momentum toward the 2% price target.

     The BOJ board's latest median forecast for real economic growth in both

fiscal 2019 and 2020 is 0.8%, slowing from 1.4% in the current fiscal year. The

board will update the medium-term outlook for economic growth and inflation rate

in January.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com