BOJ Is Said to Gain Confidence in Economy, Keep Eye on Oil

  • Economic data support the BOJ's view of a gradual recovery
  • Danger is that renewed oil slump hits inflation expectations

Bank of Japan officials are gaining confidence in the resilience of the nation’s economy, while keeping a close eye on the impact of low oil prices on inflation expectations, according to people familiar with the central bank’s discussions.

Indicators have improved in the run-up to the BOJ’s policy decision due Friday, with revised gross domestic product data showing that Japan averted a mid-year recession and that capital spending increased. Data since the last meeting in November show the economy gradually has been gathering momentum in line with the bank’s expectations, according to the people, who asked not to be identified because the talks are private.

Though Japan’s inflation rate remains distant from the BOJ’s 2 percent target, the board has decided to keep policy unchanged this year, saying low oil prices have held down consumer costs. Given the renewed slide in crude oil in recent weeks, and the risk that it will suppress prices long term, officials are closely watching gauges of inflation expectations, the people said.

“The BOJ is holding a ‘wait and see strategy,’" Deutsche Bank AG economists including Kentaro Koyama in Tokyo wrote in a Dec. 11 research note. "It is waiting for the effects of the energy price decline to fade out, allowing the economic recovery to narrow the output gap and boost inflation."

Companies’ have lowered their inflation forecasts in the past six months, according to the BOJ’s Tankan inflation survey released Tuesday, as slumping oil prices undercut the effects of the central bank’s monetary easing. Companies expect prices to rise 1.3 percent in three years’ time, down from 1.6 percent this time last year, and foresee inflation of 1.4 percent in five years, down from 1.7 percent.

BOJ Governor Haruhiko Kuroda on Dec. 8 reiterated his view that the trend for inflation was improving, while adding that the central bank won’t hesitate to adjust policy if needed. It hasn’t shifted policy since October 2014, when it boosted the annual target for expanding the monetary base to 80 trillion yen ($660 billion).

Haruhiko Kuroda
Haruhiko Kuroda
Photographer: Kiyoshi Ota/Bloomberg

Analysts have been putting off, or abandoning, their calls for any further increase in the BOJ’s asset purchases. Goldman Sachs Group Inc. earlier this month delayed its prediction for such action to April, from January.

Sentiment Holds Up

The BOJ’s quarterly report on manufacturers’ sentiment on Monday gave little reason for action by the board this week. The main Tankan index of confidence among large manufacturers held at 12 in December.

Fiscal policy steps may also reduce the focus for now on the BOJ. The Abe administration is compiling a package of about 3.5 trillion yen aimed in part at supporting spending by lower-income households. Lawmakers are also working on a corporate-tax cut for 2016 designed to encourage companies to boost investment at home.

Dubai oil dropped Monday to the lowest level since 2004. Koya Miyamae, an economist at SMBC Nikko Securities Inc., wrote in a report Monday that the BOJ might have to lower its consumer-price inflation forecast to 1 percent for the next fiscal year, from 1.4 percent.

“For the past year the BOJ has made it clear they are weighing the price trend based on inflation excluding energy,” Miyamae said. Low oil prices could give an excuse to the BOJ for not achieving the price target, he said.

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