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Lower crude oil prices beneficial for Japanese economy - RBS

FXStreet (Łódź) - Junko Nishioka, Chief Economist at RBS discusses the possible impact of the dropping oil prices on the Japanese economy.

Key quotes

"Lower crude-oil prices will improve trade income, strengthen corporate profits via reduced input costs, and lighten the household burden for the Japanese economy that relies on imports for almost all of its resources."

"Specifically, we estimate that a 20% decline in the crude-oil price will boost trade income by about JPY4tn and corporate recurrent profit by 11%."

"Benefits of lower crude-oil prices differ for industries, and we expect upstream industries with extensive intermediate input, such as basic chemicals and other petroleum-related products, to benefit most."

"We also envision a lighter burden on households, the final demand sector, on the simple assumption that companies can reduce output prices by half from the input cost savings."

"We believe this can return to the economy at least one-third of lost disposable income from the FY14 consumption tax hike, as well as cushion future tax increases from tax system revisions and rising social entitlement costs. Indeed, we expect a favourable overall impact on real economic activity from lower crude-oil prices."

"At the same time, a sudden steep drop in crude-oil prices will contribute to downward pressure on prices and may generate concerns about a delay in reaching the 2% inflation target."

"Yet, if crude-oil prices stay at current levels, we anticipate only a 0.1-0.2pp downward shift in the core CPI from our existing main scenario."

"We thus do not foresee crude-oil prices significantly delaying the realization of the 2% target, and doubt the BoJ will find it necessary to substantially lower its inflation outlook – even if it needs to reduce growth rate projections – in its end-October Outlook Report."

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