Inflation target becoming more difficult to achieve due to falling oil prices

Quotes from Societe Generale Cross Asset Research:

-We expect Japan's nationwide CPI (excluding fresh food) to have risen 2.5% yoy in January (unchanged from December). Excluding the effects of the consumption tax (CT) hike, the pace of inflation is easing and likely to be 0.5% yoy in January (down from 1.4% yoy in mid-2014).On a seasonally-adjusted basis, inflation remained 0.0% mom for the fourth consecutive month.

-Inflationary pressure is well balanced at 0.0% because the upward pressure on prices due to yen depreciation and recovering domestic demand are cancelled out by downward pressure due to the fall in oil prices. We expect the CPI to reach close to 0% yoy by mid-2015. The BoJ has continued to change its wording to explain its CPI outlook: it was "around 1.25%", later revised to "around 1.0%", and now "CPI is likely to slow for the time being".

-As the decline in energy prices has a positive effect on economic growth, further weakness in the CPI due to a fall in oil prices is unlikely to trigger immediate additional QQE. We predict that by Q3, inflation is likely to accelerate again.

-The BoJ will most likely wait patiently until then. However, by the end of October when the BoJ publishes a new semi-annual inflation and growth outlook report, we may confirm that the pickup in the CPI is weak. In such a scenario, the 2% price stability target is unlikely to be achieved in the short term, and additional QQE is likely to be implemented. Tokyo CPI (ex fresh food) is expected to be +2.1% yoy, after 2.2%yoy.