Reuters

Tokyo

The Bank of Japan looks increasingly likely to cut its inflation forecasts next month, sources say, making its target of 2% in the year from April look ever more ambitious, just three months after it eased monetary policy to keep the goal in sight.

The BoJ surprised markets on October 31 with its decision to flood the market with cash to counter the effect of slumping oil prices and weak domestic demand on inflation expectations, but oil prices have fallen 15% since then.

Some central bankers now fear core consumer inflation will slow to about 0.5% by the middle of next year as gasoline and electricity bills fall, down from May’s peak of 1.4% and far below the 2% target BoJ Governor Haruhiko Kuroda has committed to achieve.

Oil price falls are helpful for Prime Minister Shinzo Abe’s “Abenomics” policies, which are aimed at reinflating the economy, as households and companies pay less for fuel imports, but make it harder for the BoJ to lift Japan clear of two decades of crippling deflation.

The bank will issue fresh quarterly forecasts at a rate review on January 21-22.

Barring a sharp rebound in oil prices, the BoJ may slightly cut its core consumer inflation forecast for the current fiscal year from the 1.2% projected on October 31, which took into account the new monetary stimulus, according to four sources familiar with the bank’s thinking.

Pessimists on the board might also consider cutting their inflation forecasts for the fiscal year beginning in April. That could mean a small downgrade in the board’s median forecast from the 1.7% projected in October, the sources said on condition of anonymity.

This time, however, the central bank appears to be in no mood to add more monetary stimulus to boost the January inflation forecasts as it did in October.

“The October action pre-empted a lot of risks. The BoJ won’t respond just to oil price swings,” said one of the sources.

Takehiro Sato, who is among those board members pessimistic about the use of monetary easing — four of the nine voted against it in October — said last week that while consumer inflation might stall until around the middle of next year due to slumping oil prices, he saw no need for action. Many in the bank prefer to wait at least until April, when there is more clarity on whether Japan’s employers will respond to Abe’s urging to raise salaries in the spring wage negotiations.