BOJ Weighting Effects of Oil Drop on Inflation Target

The Japanese economy is apparently gaining benefits from the lowest crude oil prices in about 12 years, but that is not the case with the Bank of Japan (BOJ), which is seeking to achieve a 2 percent inflation target to bail the country out of deflation.

At a monetary policy meeting scheduled for Jan. 28 and 29, the BOJ is going to carefully discern both the positive and negative effects of falling oil prices on the economy and commodity prices of the country as Japan is a major oil importer.

While the BOJ is seeking to achieve the inflation target sometime in the latter half of fiscal 2016, the central bank is wary of the possibility that low oil prices could reduce the expectations for price rises. Once consumers and the market widely share the view that prices won’t go up, companies could be discouraged from raising retail prices and wages. Consumers could also procrastinate over purchases as they wait for prices to go down further. Such trends could foil the BOJ’s goal of achieving a “virtuous cycle from income to spending.”

The BOJ does not regard the falling oil price-induced downward pressure on commodity prices as a problem in itself, as cheap oil prices could boost the real economy through reduced cost burdens on businesses and households. If low oil prices can lead to spurring investments and consumption, that would ultimately push prices up.

via Mainichi

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza