Page 1 of 2 Early countdown to Japan rate
rise By Hisane Masaki
TOKYO - Japan's long-term interest rates
have been climbing recently in tandem with rising
global trends and amid increasingly rife
speculation that the nation's central bank will
make another rate hike earlier than expected.
As widely anticipated, the Bank of Japan's
(BOJ) nine-member policy board, including governor
Toshihiko Fukui, kept interest rates on hold on
Friday at the end of its two-day meeting.
But most analysts expect the BOJ to jack
up its key short-term
interest rate by a quarter
percentage point to 0.75% from the current 0.5% as
early as August, with some even betting on such a
rate hike in July.
Although most analysts
predict that the next rate increase will come
after an election for the House of Councilors in
July, Fukui and some other BOJ officials expressed
the view recently that the central bank should not
take such political schedules as the poll into
account in managing its monetary policy. The
election is widely expected on July 22, but could
be delayed by a week, to July 29, if the current
ordinary session of parliament, which is to close
on June 23, is extended to clear a logjam of
bills.
The Bank seems increasingly
confident that the world's second-largest economy
will keep expanding moderately and that still weak
prices will also improve in the medium and long
term. However, the BOJ policy board's unanimous
decision on Friday to keep rates steady apparently
reflects the central bank's desire to see more
data to judge whether Japan's economic growth and
price developments have become resilient enough to
withstand an additional rate increase.
Among other economic data that may
significantly influence rate policy in the next
couple of months are the BOJ's tankan
quarterly survey of corporate sentiment, due in
early July, and figures on gross domestic product
(GDP) growth in the April-June quarter, due in
mid-August. The August policy board meeting is set
for August 22-23.
First-quarter
GDP On Monday, the Cabinet Office revised
upward its estimate of GDP growth in the
January-March quarter to an annualized 3.3% in
real terms, or after seasonal adjustments, from a
preliminary estimate of 2.4%. The figure marks the
ninth consecutive quarter of growth. The revised
data showed that GDP grew 0.8% from the previous
quarter in real terms, compared with a 0.6% rise
in the preliminary report.
"This shows
that the national economy has been recovering
steadily due to the rise in domestic demand," the
Cabinet Office said. The upward revision was due
primarily to stronger corporate investment than
initially reported, which grew 0.3% on a
quarter-on-quarter basis, compared with an initial
report of a 0.9% decline. But growth in personal
consumption was revised downward to 0.8 % from
0.9%. Brisk plant and equipment investment among
non-manufacturing industries such as
transportation and construction boosted the
nation's overall corporate investment into
positive territory.
The GDP deflator, a
measure of comprehensive price changes, was
revised downward from minus 0.2% to minus 0.3%,
compared with the previous quarter, indicating
that a departure from deflation has been delayed.
The jobless rate slipped to 3.8% in April, the
lowest level since February 1998. A tighter labor
market could put pressure on both wages and prices
down the road.
Consumer prices
In late May, the Ministry of Internal
Affairs and Communications said that the core
Consumer Price Index (CPI), which excludes
volatile fresh-food prices, edged down 0.1% in
April from a year earlier. Although it marked the
third consecutive monthly fall, the rate of
decline was smaller than 0.3% in March. The core
CPI slipped 0.1% in February, the first drop in 10
months.
The core CPI reentered negative
territory due to lower oil prices than
year-earlier levels. BOJ governor Fukui said
recently that year-on-year changes in the core CPI
are expected to stay around zero in coming months
but will likely follow an upward trend in the
longer term. BOJ policy-board member Kiyohiko
Nishimura also said recently that the core CPI
will likely start registering year-on-year rises
in October.
In its semi-annual outlook
released in late April, the BOJ forecast that the
core CPI will rise 0.1% in fiscal 2007, which ends
in March 2008, and 0.5 % in fiscal 2008. In its
previous outlook released last October, the BOJ
had predicted the fiscal 2007 rise in the core CPI
would be 0.5%. In its April outlook, the central
bank also estimated the nation's economic growth
at 2.1% in real terms, or after adjustment for
inflation, in both fiscal 2007 and 2008.
The government has yet to officially
declare a victory over deflation, a downward
spiraling of prices that has plagued the economy
since an asset-price bubble burst in the early
1990s. The Paris-based Organization for Economic
Cooperation and Development warned the BOJ late
last month not to raise interest rates again
before fully getting over deflation.
There
are potential external risks to the current
Japanese economic recovery, including a possible
sharp slowdown in the US and China, Japan's two
biggest export markets, as well as a possible
further spike in oil prices and a possible
meltdown in global financial markets.
Growth in the US economy slowed to a
paltry annual rate of 0.6% in the first quarter,
the worst performance in more than four years.
However, the BOJ policy board members seem to
share the view that the US economy will likely
achieve a soft landing. As Fukui put it recently,
global growth is becoming "more balanced", with
the US slowdown being offset by strong growth
elsewhere in the world, including in China.
Rate-rise cycle In February, BOJ
raised interest rates for the first time in seven
months, by a quarter percentage point to 0.5%, in
an attempt to rectify what the central bank itself
views as the "abnormal" state of the credit
policy.
The target for the unsecured
overnight call rate, which the BOJ uses as the key
target rate in the short-term money market,
was
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