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Free AccessREPEAT: 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
To read the full story
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Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.