Conventional wisdom that a weaker yen would drive up prices in Japan across the board doesn't hold, Goldman Sachs says, as cheaper oil undercuts price pressure.
"Downward pressure on inflation from cheaper crude oil will grow more pronounced and could reach close to -0.8 percentage point mid-way through the year," Goldman Sachs senior economist Tomohiro Ota said in a note published on Friday. Crude oil prices have declined around 50 percent since last June amid a global supply glut.
"Meanwhile, we expect the inflationary pressure of yen depreciation to be only 0.4 percentage points or so at most," Ota said, because currency rates have a diminishing impact on prices.
Ending two decades of deflation is one of the key pillars of Prime Minister Shinzo Abe's economic policies and the Bank of Japan's (BOJ) mandate. But they have fallen short thus far; in February, Japan's core inflation rate came in at around zero percent on-year, excluding the effect of the consumption tax hike in April 2014, government data released on Friday showed.
Tax hike bites
Japanese households have kept their purses closed since the government raised the consumption tax to eight percent from five percent in April 2014.
In February, household spending contracted by 2.9 percent on year – the 13th straight month of contraction. But given that imports account for just 20 percent of Japanese household spending, the tax hike may be having a wider negative impact than previously thought.