International | Apr 24 2007
By Chris Shaw
On Friday the Bank of Japan (BoJ) meets to decide on interest rates, the market expecting there will be no change to the current rate of 0.50%. Westpac’s senior international economist Huw McKay suggests such a view is correct, but not when looking beyond a time frame of the next couple of months.
According to McKay there is unlikely to be any change in policy prior to the upper house election due in July, but beyond that he sees current expectations in the market as too modest.
The economic outlook is good in his view, with real GDP likely to increase by around 2% over the coming 12 months, a pace that is above trend levels. At the same time the Japanese labour market is expected to remain tight, while there are signs of improvement in property prices.
This is being offset by somewhat sluggish personal consumption and earnings data, but McKay suggests these may be a function of weather and measurement issues and so both would not be as bad as appears based on the latest results.
These weaker numbers are likely to see the bank revise down its CPI outlook to around 0.3% from 0.5% previously but according to McKay this won’t stop the bank from lifting rates in August or September by 0.25%, with a similar sized hike to follow in the December to February period.
Looking further out McKay sees potential for rates to move even higher, assuming inflation stays at around 1%. While acknowledging inflation is a long way from this currently he suggests if the strength in the corporate sector begins to flow through into the private sector such an outcome is more than realistic, which would imply upside pressure to the rate outlook.
