-- Neal Kimberley is an FX market analyst for Reuters. The
opinions expressed are his own --
By Neal Kimberley
LONDON, March 20 (Reuters)- Policymakers struggling to spark
inflation in Japan's underperforming economy probably didn't
have Crimea on their list of problems.
But some leading financial figures are raising the idea that
a prolonged crisis in the Ukrainian region annexed by Russia
might counter-intuitively result in a lower oil price that would
produce an unwelcome disinflationary impulse in Japan.
That in turn might mean more of the monetary policy
innovation in Japan that has already seen a complementary slide
in the value of the yen will be necessary in its new
financial year that begins on April 1.
It goes like this: Opponents of Russia's actions in Crimea
might try to drive the price of oil lower to pressure a Russian
economy heavily dependent on energy exports.
For Japan, a counterbalance to a lower oil price would be
the adoption of more BOJ policies that had a negative effect on
the yen's value, thereby eroding the disinflationary impact of
any fall in dollar-priced energy imports in local currency
The yen's importance in Japan's struggle to generate price
inflation cannot be overestimated.
BOJ board member Takahide Kiuchi might be a pessimist on the
Japanese economy but his remarks on Wednesday were enlightening.
"I personally take the view, however, that rises in the
inflation rate to date have been caused mainly by changes in the
foreign exchange rates," Kiuchi said.
Few foreign exchange traders would disagree with that
conclusion. But it is a candid admission from a Japanese
policymaker and it also begs the question of whether or not
Tokyo might see a further slide in the yen's value as desirable.
Oil may hold the key.
The U.S. decision to hold a test sale of 5 million barrels
of sour crude, announced on March 12, was seen by some as a
subtle message to Russia, driving down oil prices
to their lowest in a month on that day.
The price of a barrel of Brent crude had fallen to below
$106 on Thursday from $112.39 on March 3, despite the
geopolitical tension arising from the crisis in Ukraine.
Saudi Arabia, whose own oil output rose 90,000 barrels per
day to 9.85 million bpd in February, might not
necessarily object to a temporary fall in the price of crude.
While having no material interest in Crimea itself, Saudi
Arabia does find itself at odds with Russia over Syria.
Russia has been supportive of the current Syrian government
in Damascus, while Saudi Arabia has backed Sunni rebels opposing
Syrian President Bashar al-Assad's forces.
But the possibility of a lower oil price would not fit well
with Japan's efforts to generate inflation, bringing the
argument full circle to Kiuchi's comments about the yen's slide.
The BOJ will not hesitate to adjust policy to meet its
inflation target if risks to its forecasts appear, Governor
Haruhiko Kuroda said on Thursday.
That could all add up to a weaker yen.
(Editing by Hugh Lawson)