The Two Conflicting Impacts of Falling Oil Price on Japan

posted by Richard Katz on January 15, 2015 - 1:45pm

It seems to me that a falling price of oil has two conflicting impacts on Japan:

1) At least in the short-term, assuming prices don’t recover soon, it makes it well-nigh impossible for the Bank of Japan to reach its goal of 2% inflation by the second half of Fiscal 2015 (i.e. Sept. 2015- March 2016). That goal was, in the view of about 90% of major forecasters, impossible even before oil prices plunged. In fact, JP Morgan is now predicting that, if oil prices remain where they are today, Japan will go back into mild deflation in the first half of this year and to reach -0.6% deflation by June, but Morgan adds that this defation will be temporary. This is the first forecast I’ve seen of a return, albeit a temporary one, of deflation. It also disproves, as if more evidence were needed, that inflation/deflation, is not--contrary to Friedman--“everywhere and at all times only a monetary phenomenon,” or, in the words of some present-day theorists, including Kuroda, “everywhere and at all times only a psychological phenomenon,” i.e. an artifact of expectations.

2) On the other hand, lower prices are, in my view, an unalloyed piece of good news for Japan. They stop the transfer of domestic purchasing power to the oil sheiks. That means less downward pressure on real wages and profits, higher domestic demand and therefore better real growth and real living standards in Japan. They also help global growth, which means better markets for Japan’s exports, at least form those industries and firms able to take advantage. It also relieves some of the pressure on Japan’s nominal trade deficit.

Given a choice of reaching Kuroda’s goal or having better real growth and real living standards, for me it’s a no-brainer. I choose reality.