January 22, 2015 / 7:52 AM / 3 years ago

BOJ says inflation to slow further due to oil slump, soft demand

TOKYO (Reuters) - Japanese consumer inflation will slow further due to slumping oil prices, with the hit on household spending from a sales tax hike last April also acting as a drag, the Bank of Japan said on Thursday.

A shopper looks at alcohol products at an aisle in a luxury food store in Tokyo September 25, 2014. REUTERS/Yuya Shino

Needing higher inflation to emerge sustainably from years of deflation and help nurture a recovery from mild recession, the BOJ found some grounds for optimism looking further ahead.

The central bank revised up its assessment on factory output and maintained its optimism that a pick-up in private consumption will keep the economy on track for a moderate recovery, to eventually help push up prices.

“Industrial production has bottomed out due in part to progress made in inventory adjustments,” the BOJ said in a monthly report for January. That was a brighter view than last month, when it said output “appears to be bottoming out.”

The steep fall in oil prices has heightened pressure on central banks across the globe to respond to rising deflationary risks with aggressive monetary stimulus.

The BOJ refrained from expanding stimulus on Wednesday even as it cut its inflation forecast to 1.0 percent for the year beginning in April, well below its 2 percent target.

Governor Haruhiko Kuroda admitted it may take longer than expected to meet the target, but stressed that inflation will eventually accelerate as improvements in the economy push up wages and the base effect of oil price falls begins to taper.

Kuroda’s scenario, however, is bound with uncertainty.

Prices for goods ranging from food to clothing and durable goods, like television sets and personal computers, are either falling or failing to rise much as the pain from last April’s tax hike continues to weigh on consumption, the report said.

“Annual consumer inflation will likely slow for the time being reflecting the decline in energy prices,” it said.

BOJ officials hope demand will rebound enough so companies can raise prices of their goods. But consumer sentiment has barely recovered after worsening sharply from the tax hike.

Core consumer inflation, which excludes volatile fresh food prices but includes oil costs, slowed to 0.7 percent in the year to November after excluding the effect of the tax hike. Many analysts expect inflation to slow further in coming months.

The BOJ offers an outline of its economic assessment at the day of the rate review, and issues a thorough analysis on the economy and prices in a monthly report issued the following day.

Reporting by Leika Kihara; Editing by Simon Cameron-Moore

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