BOJ faces crunch time as oil slump threatens inflation target

Sun Jan 18, 2015 7:41pm EST
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By Leika Kihara

TOKYO (Reuters) - Bank of Japan policymakers gathering for a rate review this week will face the daunting task of coming up with a reason why they can hold off on expanding stimulus for now, even as slumping oil prices keep inflation further away from their 2 percent target.

Less than three months ago, the BOJ justified its shock expansion of "quantitative and qualitative easing" (QQE) as aimed at preventing oil price falls, and a subsequent slowdown in price rises, from weighing on inflation expectations.

The move kept alive market speculation that the relentless drop in oil prices, which have nearly halved since October, will force the BOJ to ease again in coming months.

At the two-day rate review ending on Wednesday, the BOJ is set to cut its core consumer inflation for next fiscal year below 1.5 percent from 1.7 percent projected in October, sources familiar with the bank's thinking said.

With the BOJ's massive purchases already pushing yields into negative territory, many board members want to hold off on expanding QQE for now.

The BOJ may therefore instead expand two loan schemes aimed at encouraging banks to boost lending and extend their deadlines beyond March, sources say.

But a surprise increase of asset purchases under QQE cannot be ruled out if the BOJ board's median inflation forecast for next fiscal year falls below 1 percent, some analysts say.

"By tying its October action to oil moves, the BOJ fell into its own trap," said Izuru Kato, chief economist at Totan Research. "Cheap oil benefits a huge importer like Japan. It's only a problem for the BOJ."   Continued...

Bank of Japan (BOJ) Governor Haruhiko Kuroda speaks during a year end meeting at Japan Business Federation (Keidanren) in Tokyo December 25, 2014. REUTERS/Yuya Shino