Japan inflation hits decade high, BOJ seen unmoved

TOKYO - Japanese annual inflation hit a decade-high 1.0 per cent in February, but the credit crisis and a stalling Japanese economy mean the Bank of Japan is still seen as more likely to cut interest rates this year than raise them.

By (Reuters)

Published: Fri 28 Mar 2008, 6:00 PM

Last updated: Sun 5 Apr 2015, 1:25 PM

Unemployment edged up in February while household spending was flat from a year earlier, data showed on Friday, prompting Economics Minister Hiroka Ota to renew her warning that the economy was stalling.

The Bank of Japan has been looking for a return to inflation after nearly a decade of deflation, but it was hoping an improving economy would drive prices up, when instead they are being pushed up by rising oil and food costs.

“The Bank of Japan can’t raise rates and I don’t think its stance will change any time soon,” said Tsuyoshi Segawa, an equity strategist at Shinko Securities.

The 1.0 per cent rise in the core consumer price index, which included oil products but not some volatile fresh food prices, topped a consensus forecast for a 0.9 per cent increase from a year earlier.

Despite the rise in inflation, many market participants expect the central bank to keep its key policy rate unchanged or even cut it from the current 0.5 per cent this year on mounting fears that financial market turmoil and slowing U.S. growth could drag Japan’s economy into a recession.

Acting BOJ Governor Masaaki Shirakawa, who is filling a post left vacant after the opposition-controlled upper house vetoed two government nominees to head the central bank, signalled that the bank was doing enough, at least for now.

“Financial markets are in confusion in the United States,” Shirakawa said in parliament. “Fortunately in Japan, accommodative (monetary) conditions are having significant effects” on the economy, he said.

Investors are pricing in about a 20 per cent chance of a rate cut by June and 50 per cent by the end of the year although many economists do not see much chance of any rate move in the near term.

Concern is building within the government, with Ota saying that higher inflation, and the rising gasoline and food prices behind it, was a problem for the economy.

“I am worried about its impact on consumer sentiment,” Ota told a news conference after a cabinet meeting.

The data had little impact on markets, which focused more on other issues. The dollar mostly hovered below 100 yen on U.S. credit worries, while the Nikkei share average rose on investors’ last-minute buying ahead of the end of the current fiscal year on Monday.


Economists warn of problems if such cost-driven inflation is prolonged, saying it will hurt consumer consumption, which makes up roughly half of Japan’s economy.

“Rising inflation deprives consumers of purchasing power when wage growth is limited, and that is what the BOJ will have to pay attention to,” said Yoshimasa Maruyama, an economist at BNP Paribas.

Japan’s seasonally adjusted unemployment rate rose to 3.9 per cent in February from 3.8 per cent in January, above a consensus market forecast of 3.8 per cent.

Overall household spending was flat in February from a year earlier in price-adjusted real terms, lagging a median market forecast for a 2.4 per cent increase.

Japan’s economy, driven by solid exports, grew 0.9 per cent in the last three months of 2007, but economists warn this may be the last strong quarter for a while, with some saying the world’s No.2 economy may already be in recession.

The deepening financial market problems spell trouble for global economic growth, which Japan relies on heavily to support its export-led growth.

This concern seems to be shared by the Bank of Japan.

A senior official at the bank said jittery overseas financial markets, particularly in Europe, were affecting Japan’s money market, which has remained relatively stable for now.

Tighter credit conditions could also offset the effect of any interest rate cut by boosting corporate borrowing costs, Hiroshi Nakaso, director-general of the BOJ’s financial markets department, said in a forum hosted by the Cabinet Office.

The BOJ will hold its next policy meeting on April 8-9 and another meeting on April 30.

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