Japan firms' inflation expectations fall, keep BOJ under pressure

By Leika Kihara

TOKYO (Reuters) - Japanese firms' inflation expectations fell from three months ago as slumping oil costs weighed on underlying price growth, a Bank of Japan survey showed on Tuesday, adding to doubts on the effectiveness of the central bank's massive stimulus program.

The outcome may heighten market expectation of near-term monetary easing since BOJ Governor Haruhiko Kuroda has said the bank won't hesitate to act if sliding inflation and overseas headwinds discourage firms from raising prices, analysts said.

"It's looking increasingly like last October, when the oil rout and weak consumption drove the BOJ into easing," said Mari Iwashita, chief market economist at SMBC Friend Securities.

"The number of firms that are raising prices may have peaked. If commodity prices continue to fall and wages fail to pick up, the BOJ may ease in January," she said.

The BOJ has pledged to accelerate inflation to 2 percent by aggressively pumping money into the economy, betting that companies and households will spend more now than save on expectations that prices will rise ahead.

But companies polled by the BOJ, as part of its detailed "tankan" survey for December, showed they expect consumer prices to rise an average 1.0 percent a year from now, lower than their projection three months ago of 1.2 percent.

Respondents also expected consumer inflation to reach 1.3 percent three years from now, down from 1.4 percent in the September survey, and 1.4 percent five years from now, down from 1.5 percent expected in September, the survey showed.

The results cast doubts on Kuroda's argument that inflation expectations are heightening thanks to the effect of his stimulus program, dubbed "quantitative and qualitative easing"(QQE).

Japan barely dodged recession in the third quarter as China's slowdown and feeble wage growth weigh on exports and consumption.

Kuroda has said the BOJ will look through the effect of oil moves on inflation, though policymakers worry that companies may use sliding consumer prices as an excuse to forgo wage hikes.

(Reporting by Leika Kihara; Editing by Shri Navaratnam and Eric Meijer)

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