International | Nov 01 2006
By Chris Shaw
This week the Bank of Japan (BoJ) released its half yearly “Outlook for Economic Activity and Prices” report, which showed estimates for the economy are little changed from the previous report in April.
Danske Bank notes inflation forecasts have been revised down slightly, with core CPI now estimated to increase 0.3% in the financial year to March 31 against a 0.6% increase estimate previously, while for the next financial year the forecast is now a 0.5% increase, down from 0.8% previously.
There has been no change to the bank’s estimate for GDP this year of growth of 2.4%, though the outlook for next year is slightly more optimistic at 2.1%, up from the 2.0% forecast in April.
Given so little has changed in the BoJ’s assessment of the economy Danske sees little likelihood of a rate increase before the end of the year, suggesting the Mach quarter next year is a more likely time for rates to be lifted to deal with the inflationary pressures emerging from a tightening labour market, the weak currency and ongoing solid growth.
Macquarie is more aggressive and continues to predict rates will move higher again by the end of the year, before a further four hikes in 2007. Its view is based on comments in the report indicating the BoJ’s focus remains on longer-term data, so weaker inflationary expectations in the short-term are unlikely to alleviate the push to move rates higher to counter the future pressures of rising unit labour costs.
While its rate outlook is for more increases than many are forecasting, Macquarie’s view is such a move would still see monetary policy on the loose side of neutral as factoring in inflation and growth forecasts suggests a neutral rate of around 2.25%, while Macquarie’s expectation is for rates to increase to around 1.5%.
This fits in to Danske Bank’s view there is upside risk to current rate forecasts, as it estimates futures markets are pricing in rates of only around 1.0% in a year’s time. But timing remains the issue, as Morgan Stanley is more on the Danske Bank side in anticipating the next hike won’t be until the March quarter, as in its view recent weakness in industrial production data makes a hike before Christmas less likely.
