Japan Consumer Price Gains Accelerate, Supporting BOJ's Outlook
March 3 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in eight years in January, increasing the chances that the central bank will end its deflation-fighting policy as soon as next week.
Core consumer prices, which exclude fresh food, increased 0.5 percent from a year earlier after 0.1 percent gains in November and December, the statistics bureau said today in Tokyo. That was more than the median 0.4 percent forecast of 33 economists surveyed by Bloomberg News and was the first time the gauge has risen for three straight months since April 1998.
The report adds to speculation that the central bank's policy makers will next week start to reduce the amount of cash it pumps into the economy, a precursor to lifting interest rates from near zero. An end to a seven-year bout of deflation may support corporate earnings, helping wages and loan demand in an economy that will probably grow this year at 3.2 percent, the fastest pace since 1991.
``Investors and traders have already factored in the Bank of Japan changing its policy in March or April,'' said Seiji Adachi, a senior economist at Deutsche Securities in Tokyo. ``If the central bank doesn't take action by then, it would risk spooking financial markets.''
Japan's economy grew at an annualized 5.5 percent in the final three months of 2005, outpacing both Europe and the U.S. The economy will probably grow for a seventh straight year in 2006 and at its fastest pace since 1991, a survey of 16 economists surveyed by Bloomberg News between Feb. 17 and 27 said. That would mark its longest postwar expansion.
Bank of Japan Governor Toshihiko Fukui has been preparing investors for a change, saying policy will ``immediately shift'' once conditions set by the bank are met.
Pledge
The central bank has vowed not to adjust its five-year-old policy until core prices stop falling for at least a few months and policy makers are sure they won't resume sliding. It also needs to be confident about the overall strength of the economy.
The bank's policy makers are scheduled to meet next on March 8-9, April 10-11 and April 28.
The bank will hold interest rates near zero for a while after it reduces the 30 trillion yen ($258 billion) to 35 trillion yen of reserves it now makes available to lenders, Fukui has said.
Three-month Euroyen futures indicate that traders are betting the central bank will raise interest rates by at least a quarter- percentage point in the last quarter of this year.
Core price gains accelerated in January mainly because the effects of a cut in phone charges from January 2005 eased, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.
``Japan's core consumer prices will continue to be pushed up by similar factors in February and March, and their increases are not likely to slow from April onwards,'' because the economy will keep expanding, Muto said.
Wage Gains
Monthly average wages, a key component that influences consumer prices, had their biggest gain in 18 months in December. Producer prices rose at the fastest pace in almost 16 years in January, prompting chemical and steel makers to pass on energy and commodity costs to customers.
Core prices in Tokyo, home to one in 10 Japanese, rose 0.2 percent in February, the first back-to-back gain since August 1998.
Excluding energy and food, Japan's nationwide consumer prices rose 0.1 percent in January, the statistics bureau said. This gauge of prices is widely used in the U.S. and Europe to measure inflation.
Easing Pressure
Government officials signaled earlier this week that they won't oppose a move by the central bank to cut the amount of cash it pumps into the economy, reversing their initial objections on concern it would cause rates to rise, stifling growth, and increasing interest payments on the nation's debt.
Prime Minister Junichiro Koizumi and ruling Liberal Democratic Party's policy council head Hidenao Nakagawa said on Feb. 27 the central bank should make its own decision when to change its policy as long as it cooperates with the government to beat more than seven years of deflation.
The Bank of Japan may want to stick with its policy until April to check price movements for another month or two, said Naoki Iizuka, chief market economist at Dai-Ichi Life Research Institute in Tokyo.
``The central bank has said it wants to assess a price trend averaging over a few months, and if it waits until April, it can confirm more solid increases,'' Iizuka said. ``That will back up the bank's case that they expect consumer prices to show stable gains.''
February consumer prices will be published on March 31 and March prices are probably due on April 28. Iizuka expects core price gains to average about 0.4 percent in the first quarter.
Basket of Goods
The government plans to adjust the basket of goods used to compile consumer prices in August, probably to include more consumer electronics items. Previous revisions lowered prices because of declines in the costs of some of the items added.
The central bank will release on April 28 its projection of annual core price gains for the year starting April 1 and the following one.
Bank of Japan officials have said they plan to present guidance to signal the bank's policy direction and stabilize interest rate expectations when it announces a change to the policy.
The bank hasn't decided whether to use a numerical price reference or ``forward-looking language'' to indicate future policy changes, Deputy BOJ Governor Toshiro Muto said on Feb. 2.
``Financial markets are now focusing on how the BOJ will describe its guideposts to contain interest rate increases, rather than the timing of a policy change,'' said Yasunari Ueno, chief market economist at Mizuho Securities Japan Co. ``It's hard to stabilize market expectations with guidance which depends only on language.''
LDP's Nakagawa has urged the central bank to target a 2 percent inflation rate. |
