Japan to continue 0% interest rates
The Bank of Japan is poised to abandon its forecast of a return to inflation this fiscal year, according to Yutaka Yamaguchi, a former deputy governor.The move would delay a departure from zero interest rates until the March 2006-March 2007 financial year at the earliest.
Mr Yamaguchi said at a Tokyo press conference that the BoJ’s much-watched half yearly forecast, due out next week, would reverse its October prediction that the economy would finally climb out of deflation this year by registering a consumer price rise of 0.1 per cent.
Instead it would predict yet more deflation, he said “The actual price development is running below the forecast path . . . which leads us naturally to think that the forecast would be negative rather than positive,” he said.
He expected the BoJ to soften the blow by predicting inflation in the year to March 2007. But a projection so far ahead lacked credibility, he added.
The ending of zero interest rate policy – and with it the normalisation of Japan’s monetary framework – would now almost certainly be pushed beyond this fiscal year, though even after that “the timing of the exit is still highly uncertain”.
The assessment of the former governor, who still carries considerable weight in policy making circles, will come as a blow to investors hoping for an early end to deflation.
Consumer prices have been falling for more than seven years. In February they were still dropping by 0.4 per cent. The BoJ has blamed some of the fall on deregulated utility prices. The economy has also slowed more sharply than expected. Subsequent data have revealed Japan was in a recession when the BoJ made its optimistic projections.
Since October, economic data had been weak and business confidence had fallen.
Mr Yamaguchi said the so-called quantitative easing framework had failed in its principal aim of fighting deflation by stimulating economic and price activity. Under quantitative easing the bank floods the market with excess liquidity.%
Mr Yamaguchi said at a Tokyo press conference that the BoJ’s much-watched half yearly forecast, due out next week, would reverse its October prediction that the economy would finally climb out of deflation this year by registering a consumer price rise of 0.1 per cent.
Instead it would predict yet more deflation, he said “The actual price development is running below the forecast path . . . which leads us naturally to think that the forecast would be negative rather than positive,” he said.
He expected the BoJ to soften the blow by predicting inflation in the year to March 2007. But a projection so far ahead lacked credibility, he added.
The ending of zero interest rate policy – and with it the normalisation of Japan’s monetary framework – would now almost certainly be pushed beyond this fiscal year, though even after that “the timing of the exit is still highly uncertain”.
The assessment of the former governor, who still carries considerable weight in policy making circles, will come as a blow to investors hoping for an early end to deflation.
Consumer prices have been falling for more than seven years. In February they were still dropping by 0.4 per cent. The BoJ has blamed some of the fall on deregulated utility prices. The economy has also slowed more sharply than expected. Subsequent data have revealed Japan was in a recession when the BoJ made its optimistic projections.
Since October, economic data had been weak and business confidence had fallen.
Mr Yamaguchi said the so-called quantitative easing framework had failed in its principal aim of fighting deflation by stimulating economic and price activity. Under quantitative easing the bank floods the market with excess liquidity.%
April 22, 2005
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