International | Aug 11 2006
By Chris Shaw
After lifting interest rates last month the Bank of Japan (BoJ) stated it would not follow that up with another rate increase this month, preferring instead to adopt a more conservative approach of relying on economic data to judge the health of the economy.
In Macquarie’s view the most recent data suggests it won’t take long before further interest rates increases are required, as it suggests its previous estimate of the next increase occurring in the first quarter of 2007 is now more likely to be brought forward to this year.
The broker notes data for July shows domestic corporate goods prices rose 0.7% month-on-month, which equates to a year-on-year increase of 3.4% and above consensus estimates of a 3.1% increase. While this is adjusted to 2.4% if fuel and utilities prices are excluded, the figure is still accelerating.
At the same time import prices have risen 16% year-on-year, resulting in an overall increase in the price of domestic demand related products of 5.3% year-on-year. This means there is now upward pressure on inflation in the broker’s view, particularly as to date companies have refrained from passing on much of the increase in input costs they have experienced.
It suggests this is likely to change though, a view confirmed by Nippon Paper Group’s decision to lift prices next month and Japan Air Lines considering a similar move. This indicates the risk to the inflation rate remains to the upside, a view shared by JP Morgan who points out the economy is continuing to show signs of strong growth, as evidenced by the 8.5% increase in machinery orders in June.
This is one sign business investment is running at strong levels, the broker also pointing out total capital spending rose 12.9% year-on-year in the last financial year. It suggests this implies a growth outcome of about 3% for the economy overall, while also pointing to a continued positive outlook given businesses are lifting spending despite rates having been increased.
In its view the key to the next rate increase will be the BoJ’s Outlook Report due in October, which it expects will show higher forecasts for both the core consumer price index and gross domestic product. As a result, like Macquarie it sees a further increase in rates by the end of the year, though it remains uncertain as to whether the additional 0.25% increase it is forecasting will occur in November or December. It then expects further quarterly increases of 0.25%, with rates to reach 1% next year.
