International | Jul 06 2006
By Chris Shaw
Last week’s release in Japan of quarterly Tankan survey results, which measure the outlook for economic confidence and the capital expenditure plans of corporations, have led market watchers to suggest there is an increased likelihood the Bank of Japan (BOJ) will lift official interest rates when it meets next week.
The survey results came in basically in line with expectations and show large corporations perceive business conditions have improved slightly over the last few months, so the market is factoring in an increase of 0.25% in official rates.
Deutsche Bank is one to suggest the rise will occur next week, the broker taking the view the survey results suggest there are a number of positives for the economy overall. Morgan Stanley’s Takehiro Sato agrees a rate rise is now more likely, as the surprising increase in capital expenditure plans for large corporations are a sign of a brighter economic outlook.
He also notes the BOJ is likely to act next week to avoid appearing as if it was playing politics, as the economic data now supports an end to the zero interest rate policy (ZIRP) and the only reason not to move on rates would be the recent public scrutiny over BOJ governor Toshihiko Fukui’s personal financial dealings.
For Merrill Lynch’s Jesper Koll the key question is would any increase in rates derail the economic recovery Japan is currently enjoying, with an assessment of the economy suggesting the answer is no given the differences between the economy’s health now and in 2000 when a previous attempt was made to lift rates above zero.
Koll points out the yen is now significantly weaker than was the case six years ago, while the bank credit cycle is far more positive than it has been for many years. Additionally, he notes credit costs have fallen and corporate balance sheets are now far stronger than was the case even a few years ago, which indicates a far more resilient economy that could withstand the impact of higher interest rates.
Given the likelihood of increasing capacity utilisation and a labour market currently in a position of excess jobs to the level of demand, along with evidence of rising consumer prices, Koll suggests an increase in official rates now is actually prudent policy rather than a questionable move.
He points to the fact the overall economy is actually expanding faster than its supply capacity is increasing as providing support for his forecast of stronger than expected growth this year. He is forecasting a 3.1% increase in GDP for the year to next March, with an average growth rate over the next five years of 2.5%.
In his view this supports the likelihood of further action by the BOJ in an attempt to normalise interest rates in the coming year, leading Koll to forecast 25-basis point rate increases each quarter to bring Japanese government bonds to a rate of 2.5% by March 31 next year.
Deutsche Bank also sees potential for further rate increases, as it notes the combination of the current tight labour market and increasing input and raw material costs are likely to impact on corporate profits at some point in the future. The broker suggests as corporations then move to protect profits by lifting prices, so sparking inflation, the BOJ may be forced to act and lift rates sooner than may otherwise have been anticipated.
Morgan Stanley’s Sato disagrees, suggesting the pace of future rate increases is likely to be slower than the market anticipates. While acknowledging there may be a push for a further increase in August, Sato suggests inflation figures due later that month will offset the need for a more hawkish stance on the part of authorities.
