Sat, Mar 04, 2006 page10

• Consumer prices rise in Japan for third straight time

  CHANGE IN DIRECTION The third month of higher consumer prices signaled that the central bank may end its loose monetary policy by raising rates

  • AFP
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  Japan snapped out of its long deflationary spiral with a third straight rise in consumer prices that stoked speculation the central bank may end its ultra-loose monetary policy as soon as next week.

  Core consumer prices increased 0.5 percent in January from a year earlier, the government said yesterday, the fastest pace since March 1998.

  The data spooked investors, sending the benchmark Nikkei-225 index sliding 1.55 percent on worries about how the world's second-largest economy will cope with an end to almost five years of virtually free credit.

  It was the first time for almost eight years that core consumer prices have risen for three months in a row, clearing the way for the Bank of Japan to scrap its extraordinary policy of flooding the financial system with cash.

  "The forces that previously caused deflation in Japan are well and truly over," said Stefan Worrall, economist at Credit Suisse First Boston.

  He said strong employment, domestic and external demand, as well as industrial production all supported that view.

  "Today's figures will only heighten the sense that monetary policy is about to change. It may well change next week or in April," Worrall said.

  Timing in question

  Morgan Stanley economist Takehiro Sato said it was now "all but certain" that the Bank of Japan would change policy on Thursday although others maintained a move was more likely next month.

  Financial markets now expect the central bank to begin raising interest rates by the end of this year.

  Even Prime Minister Junichiro Koizumi, who has previously taken a cautious view, said there were signs that an end to deflation was finally in sight.

  "We are seeing signs of getting out of deflation," Koizumi said.

  Previously he had insisted it was too soon to say deflation was over, urging the Bank of Japan not to act prematurely for fear of slamming the brakes on the economic recovery and sparking a return to falling prices.

  For years deflation hit company profits and salaries, leaving the economy stuck in a rut for almost a decade and now with debts equivalent to 160 percent of national output after the government spent trillions of yen to spur growth.

  Out of the doldrums

  Following its long slump, the economy now appears to have finally broken out of its deflationary doldrums with annualized growth of 5.5 percent in the fourth quarter of last year.

  The Bank of Japan's case was boosted by the third consecutive increase in the core consumer price index (CPI) in January after rises of 0.1 percent in both November and December. The market had expected a rise of 0.4 percent.

  The central bank has been swamping the banking system with far more liquidity than is actually needed to drive interest rates down to zero, after deciding that rock-bottom lending rates alone were not enough.

  A newspaper reported that Bank of Japan officials have now entered "the final stage of negotiations" toward proposing an exit on Thursday of next week from the ultra-loose policy, known as quantitative easing.

  If the proposal was made, most members of the board would be expected to vote for it, the mass-circulation Yomiuri Shimbun said without naming sources.

  The government also announced yesterday that Japan's unemployment rate rose to 4.5 percent in January from 4.4 percent the previous month but analysts said the figures were in keeping with an overall improvement in employment levels.
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