Less Than Zero: Japan's CPI Falls as Oil Rout Trumps Kuroda

  • Price drop will spur debate on boosting monetary policy
  • BOJ is back where it started more than two years ago

After hovering near zero for months, the Bank of Japan’s main inflation gauge dropped into negative territory as weak domestic demand and plunging oil prices wiped out the impact of Governor Haruhiko Kuroda’s unprecedented monetary stimulus.

As forecast, consumer prices excluding fresh food fell 0.1 percent in August from a year earlier, the first decline since April 2013, the same month Kuroda embarked on a campaign of record asset purchases to rid Japan of its "deflationary mindset." Stripping out food and energy, prices rose 0.8 percent in August.

This latest price data underscore mounting challenges to the reflation campaign led by Kuroda and Prime Minister Shinzo Abe, with the economy contracting last quarter amid disappointing household spending, industrial production and business investment. October is shaping up as key a month for the BOJ, with almost one-third of economists surveyed by Bloomberg forecasting the central bank will add to its stimulus when it updates its estimates for growth and inflation.

“The drop in prices brings more unpleasant news for the BOJ,” Masamichi Adachi, an economist at JPMorgan Chase & Co. and former BOJ official, said before Friday’s report by the statistics bureau. “It’s getting harder to defend keeping policy unchanged.”

Gasoline Prices

Energy prices in August dropped 11 percent from a year earlier, with gasoline falling almost 18 percent. In Tokyo in September, the main price gauge fell 0.2 percent from a year earlier, with the 13 percent drop in energy prices in the capital this month beating large rises in the price of televisions and other durable goods.

"The impact of falling energy cost will peak out this fall," said Mari Iwashita, the chief market economist at SMBC Friend Securities Co. in Tokyo, who doesn’t see any need for further stimulus in October.

Kuroda, speaking after a meeting with Abe Friday, said price trends remain strong and that inflation remains present after excluding energy costs.

A new gauge that the BOJ has been focusing on recently showed price gains accelerating to 1 percent year on year in August, up from 0.9 percent in July, according to calculations by Bloomberg Intelligence economist Yuki Masujima. This measure strips out fresh food and energy.

Kuroda has said previously that the bank won’t hesitate to adjust policy if there is a danger of prices not rising to the main target.

The BOJ expects inflation to reach its goal around the six months through September 2016, he said earlier this month when the banks’ board policy was left unchanged. 

China Impact

Deputy Economy Minister Yasutoshi Nishimura offered a different view this week, suggesting that hitting the target may be delayed as China’s economic slowdown affects the price of oil and other natural resources.

The market also has another perspective. The break-even rate, which looks at the difference in yields between regular bonds and inflation-linked debt, points to prices rising an average of 0.84 percent annually over the next 10 years, down from about 1.1 percent in May.

The yen fell 0.1 percent to 120.17 per dollar at 1:39 p.m. in Tokyo. It’s slumped 23 percent since Kuroda launched his stimulus in April 2013.

No economist in the Bloomberg survey expects price gains to reach the target in the central bank’s stated time frame.

Some BOJ officials see a growing likelihood the central bank will lower its inflation outlook and push back the schedule for reaching 2 percent because of the fall in oil prices, people familiar with the discussions said earlier this month.

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