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It is a very merry Christmas from Tokyo Electric Power.

Last week, Japan’s biggest utility by service area said that the drop in the oil price was one of the reasons it would freeze rates for households next year, despite a weaker yen pushing up the cost of fuel.

Some companies in other parts of Japan are even holding out for cuts in their power bills caused by the collapse in crude. That would be quite a prospect, at a time when the country’s nuclear plants are still out of action almost four years on from the Fukushima crisis.

But what is good news for Japan Inc is not necessarily good news for the Bank of Japan, which is aiming for a 2 per cent rate of inflation within the coming fiscal year.

When governor Haruhiko Kuroda announced another shot of monetary stimulus at the end of October, he said he was doing so with one eye on the drop in crude, which was threatening Japan’s exit from a “deflationary mindset”.

But the price of oil has fallen another 25 per cent or so since then, making the BoJ’s 2 per cent target look even more remote. Data due on Friday is expected to show a slide to 0.7 per cent in Japan’s nationwide consumer price index in November, excluding taxes and fresh food, from 0.9 per cent in October.

If oil remains less than $60 a barrel, the index could fade to 0.3 per cent by the second quarter next year and 0.1 per cent by the third quarter, even if the yen keeps falling, according to estimates from Citi. The newest inflation-linked bond is now trading at levels implying average price rises of just 0.8 per cent a year over the next decade. That is the lowest since it was issued in October 2013.

At his press conference after the BoJ policy board meeting last Friday, Mr Kuroda batted away questions on falling oil saying that, over time, cheaper fuel should support prices by boosting activity.

But in the meantime, it is notable that the yen has weakened while the benchmark 10-year bond yield closed at another record low on Monday.

If oil stays where it is, the market seems to be saying, another round of easing from the BoJ next year looks more likely than not.

ben.mclannahan@ft.com

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