BOJ under pressure as some board members question inflation target

By Stanley White

TOKYO (Reuters) - Three members of the Bank of Japan's policy board expressed doubts the central bank can meet its inflation target because of a slowdown in underlying prices and falling oil, pointing to chinks in the BOJ's strategy to spark sustainable growth.

One of the three members said that even though the yen is weak, annual inflation excluding food and energy is only slightly above zero, according minutes of the bank's January monetary policy meeting published on Monday.

Another of the three members said the collapse in oil prices from last year has slowed inflationary momentum.

Many on the BOJ's nine-person board said the 2 percent price target can be met assuming a gradual increase in oil prices. But if oil prices remain low, more policy makers could start to openly question the central bank's policy framework.

The BOJ kept monetary policy steady at the January meeting and expanded a programme aimed at encouraging banks to boost lending.

In a quarterly review of its long-term forecasts in January, the BOJ cut its core consumer inflation projection to 1.0 percent for fiscal 2015 from an estimate 1.7 percent issued three months ago, largely due to the global oil price slump.

The BOJ is buying government debt and risk assets to push inflation to 2 percent as it aims to vanquish years of grinding deflation and spark sustainable growth.

Many economists view the BOJ's fiscal 2015 timeline for hitting its inflation goal as too ambitious.

Members of Japanese Prime Minister Shinzo Abe's cabinet have said they are willing to tolerate a short-term slowdown in inflation because oil prices have collapsed by about half since the middle of last year.

In December consumer prices excluding food, energy and the impact of a sales tax hike last year rose an annual 0.1 percent, a worrying sign that underlying demand is not strong.

When the BOJ updated its economic forecasts last month it said it expects oil prices to rise to around $70 per barrel by the end of fiscal 2016, but some economists say this may be overly optimistic.

At a subsequent meeting last week, the BOJ remained steadfast in its view that the economy will continue to recover moderately and indicated it does not see the need to ease further in the near future.

However, if inflation fails to accelerate the central bank could be forced to reconsider its policy options later this year.

(Editing by Eric Meijer)