Deflation Deepens in Japan
BOJ May Keep Interest Rates Near Zero as Deflation Deepens
Feb. 25 (Bloomberg) -- The Bank of Japan will probably keep interest rates almost at zero as the fastest economic growth in more than 13 years fails to stop prices falling, economists said.
Governor Toshihiko Fukui and his eight policy board colleagues will also keep monthly purchases of government bonds from banks at 1.2 trillion yen ($11 billion) and leave the upper limit of the bank's target for reserves available to them at 35 trillion yen during a one-day meeting on Thursday, said all 15 economists surveyed by Bloomberg News.
The world's second-largest economy expanded at a 7 percent annual pace last quarter, the fastest since 1990, as exporters such as Sharp Corp. and Canon Inc. increased investment, a government report showed last week. The same report showed prices fell at the second-fastest pace in 23 quarters.
``There are few reasons that the Bank of Japan must change its policy for now,'' said Seiji Shiraishi, chief market economist in Tokyo at Daiwa Securities SMBC Co., among the top five buyers of Japanese government bonds at auction. ``Japanese financial markets are stable and the bank has no headwind.''
Nationwide core consumer prices, the price index the bank watches most closely, have risen once from the year-before level since April 1998. The GDP deflator, a measure of price changes used to calculate the difference between nominal and real gross domestic product, fell 2.6 percent from a year earlier in the fourth quarter.
Deflation
``Price declines for electronics products are continuing,'' Tetsuya Kawakami, a managing director at Matsushita Electric Industrial Co., the world's largest consumer-electronics maker, said at a press conference this month. ``We must make up for those declines by efforts to cut costs.''
Japanese bond futures rose for the fourth day in five yesterday on expectations the economy will slow and as a decline in share prices fueled demand for fixed-income securities.
Ten-year bond futures for March delivery rose 0.10 to 140.09. The Nikkei 225 Stock Average fell 2.1 percent, the biggest drop this year, to 10,644.13 on concern that gains in technology stocks had outstripped their profit potential.
The central bank lowered interest rates to almost zero in March 2001 and has pledged to keep them there until core consumer prices, excluding fresh food, stop falling for at least a few months and the bank is sure they won't fall again.
Kazumasa Iwata, one of the central bank's two deputy governors, last week said ``somewhat strong'' economic growth won't affect the zero-rate policy. Japan's economy must grow about 2.5 percent a year for two years to overcome deflation, he said. The economy grew 2.7 percent in 2003 in real terms.
Pressure Easing
A decline in the yen last week is easing pressure on the central bank to pump more cash into the economy. The yen's 11 percent advance against the dollar last year hurt exporters by making Japanese products more expensive overseas and deepened deflation by making imported goods cheaper.
The yen last week fell 3.3 percent against the dollar, its biggest weekly drop in five years, after the central bank sold yen on at least one day, adding to the record 7.15 trillion yen sold last month to protect exporters.
The Japanese currency traded at 108.42 yen per dollar at 5:22 p.m. yesterday in Tokyo.
The central bank last month unexpectedly decided to pump more cash into the economy, which it said was recovering gradually. The policy board voted to raise the upper limit of the bank's target for reserves available to lenders by 3 trillion yen.
``Financial markets tend to get volatile at the end of March, when Japanese companies close their books,'' said Masaaki Kanno, a former central bank official and now head of research at J.P. Morgan Securities Asia Ltd. ``It's highly possible the bank will lift the reserve target again if the yen rises further.''
Reserve Target
Twelve of the 15 economists surveyed said the bank will probably lift the reserve target and pump more cash into the economy within three months if the yen rises more.
Fukui told parliament this month that the Bank of Japan will implement ``additional'' policy action if needed. Since Fukui became governor on March 20 last year, the bank has raised the limit of the reserve target five times from 20 trillion yen.
The central bank has used the target -- the amount of money it makes available to lenders in the money market -- as its main tool for adjusting monetary policy because overnight rates are almost zero.
The bank will announce any policy decisions probably by early afternoon Thursday. Fukui will speak at a press conference at 3:30 p.m. Minutes of this week's meeting will be published on April 14.
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