International | Aug 28 2006
By Chris Shaw
Revised inflation data from Japan late last week caught the market by surprise as it showed deflation was persisting in the economy months after it had apparently been beaten.
Revised Consumer Price Index (CPI) data was revised down, Danske Bank noting the result of 0.2% year-on-year was below market consensus expectations of a 0.4% year-on-year increase.
The result was a fall in both the currency and bond markets, as traders interpreted the data as meaning further rate increases would take longer to be implemented. It is a view the experts share, with Macquarie, DBS and Danske Bank all suggesting it is now unlikely there will be further increases in Japanese interest rates this year.
DBS suggests the next increase in rates is now likely in the March quarter next year, as evidence should then show inflation trending towards an outcome of 0.3-0.6% for 2007, compared to a likely figure of about 0.4% this year. In DBS’s view the news is not all bad though, as the economic recovery appears to be intact despite the ongoing deflationary issues.
Macquarie notes with the benefit of hindsight the Bank of Japan (BoJ) probably moved too quickly to end the zero-interest rate policy, but it too has not changed its view the recovery remains on course given productivity is improving and business confidence remains solid.
It expects a delay of about a quarter in terms of future rate hikes, meaning the broker’s timetable matches that of DBS in terms of the next rate increase. Danske Bank concurs, but suggests the market generally is not pricing in enough moves in later periods, as current expectations are for four rate increases in total, which would bring the official interest rate to around 1.0%. Instead, Danske suggests the bank is likely to lift rates every three to four months through 2007 and 2008, which would result in official rates of 1.5-2.0% instead.
