Japan deflation streak unbroken
Saturday, 1 September 2007
David Turner , FT Syndication Service
TOKYO: Japan remained mired in deflation for the sixth straight month in July, according to official figures published on Friday that showed a 0.1 per cent fall in core consumer prices.
The news will make it still harder for the Bank of Japan (BoJ) to raise interest rates at its September monetary policy meeting.
Only a few months ago, an autumn rate rise had become the consensus view among Japan economists. But since then, turmoil in global credit markets and a fall in Japanese share prices have generated a wait-and-see attitude among BoJ board members, making them reluctant to raise the benchmark rate above its current 0.5 per cent level. Thursday's weak retail sales figures, and Friday's evidence of continuing deflation, make a rate rise in September even less likely.
But Friday's economic figures also contained material for hawks at the BoJ, should they wish to use it. August core consumer prices in Tokyo - seen as a leading indictor for the country as a whole - defied expectations of continuing deflation by remaining unchanged. Moreover, the unemployment rate inched down 0.1 percentage points to a nine-year low of 3.6 per cent, suggesting tight labour demand will eventually create price pressure through higher wages.
A top government spokesman gave mild support to the Bank of Japan's policy. Kaoru Yosano, appointed chief cabinet secretary earlier this week, told a news conference the July fall in the core consumer price index was not "an indication of falling prices". However, he added: "I was thinking financial markets were stable. But now US subprime problems are said to be leading to credit crunches. I trust that the BoJ will pay attention to those things."
The comments, made by a known advocate of central bank independence, closely mirror the thinking of many Bank of Japan officials.
In theory, the Bank of Japan will be able to raise rates in September even though the latest figures show nationwide deflation, since the central bank takes a forward-looking approach, looking at future rather than present prices. But a rate rise at such a time would be widely criticised by the government, which does not want higher borrowing costs to impede economic growth, and by many economists, who argue no central bank should raise rates on the assumption that deflation will inevitably end. Economists say after deflation takes root in an economy, it is often stubbornly persistent and hard to eradicate.
Numbers out Friday also showed falls in industrial production and household spending in July, which will provide further encouragement to BoJ bearishness on interest rates. Household spending slipped 0.1 per cent year-on-year. Industrial output fell a seasonally adjusted 0.4 per cent from the previous month.
TOKYO: Japan remained mired in deflation for the sixth straight month in July, according to official figures published on Friday that showed a 0.1 per cent fall in core consumer prices.
The news will make it still harder for the Bank of Japan (BoJ) to raise interest rates at its September monetary policy meeting.
Only a few months ago, an autumn rate rise had become the consensus view among Japan economists. But since then, turmoil in global credit markets and a fall in Japanese share prices have generated a wait-and-see attitude among BoJ board members, making them reluctant to raise the benchmark rate above its current 0.5 per cent level. Thursday's weak retail sales figures, and Friday's evidence of continuing deflation, make a rate rise in September even less likely.
But Friday's economic figures also contained material for hawks at the BoJ, should they wish to use it. August core consumer prices in Tokyo - seen as a leading indictor for the country as a whole - defied expectations of continuing deflation by remaining unchanged. Moreover, the unemployment rate inched down 0.1 percentage points to a nine-year low of 3.6 per cent, suggesting tight labour demand will eventually create price pressure through higher wages.
A top government spokesman gave mild support to the Bank of Japan's policy. Kaoru Yosano, appointed chief cabinet secretary earlier this week, told a news conference the July fall in the core consumer price index was not "an indication of falling prices". However, he added: "I was thinking financial markets were stable. But now US subprime problems are said to be leading to credit crunches. I trust that the BoJ will pay attention to those things."
The comments, made by a known advocate of central bank independence, closely mirror the thinking of many Bank of Japan officials.
In theory, the Bank of Japan will be able to raise rates in September even though the latest figures show nationwide deflation, since the central bank takes a forward-looking approach, looking at future rather than present prices. But a rate rise at such a time would be widely criticised by the government, which does not want higher borrowing costs to impede economic growth, and by many economists, who argue no central bank should raise rates on the assumption that deflation will inevitably end. Economists say after deflation takes root in an economy, it is often stubbornly persistent and hard to eradicate.
Numbers out Friday also showed falls in industrial production and household spending in July, which will provide further encouragement to BoJ bearishness on interest rates. Household spending slipped 0.1 per cent year-on-year. Industrial output fell a seasonally adjusted 0.4 per cent from the previous month.