International | May 15 2006
Quarterly growth figures for the Japanese economy are due this week and while the expectation among economists is for a fall in the growth rate compared to the previous quarter, the case for an interest rate increase is likely to be even stronger.
The market is expecting a growth figure of just over 1% for the quarter, which at first glance is a sharp fall from the 5.4% achieved in the previous quarter. This can be explained though by a fall in consumer spending, which had doubled in the previous quarter but is now returning to more normal levels.
The economy is expected to post annual growth of about 3.2% for the year to March 31st.
While this in itself may not be enough for an earlier than expected increase in official interest rates, in combination with the GDP deflator figure there may be enough evidence for such a move in the next couple of months.
The GDP deflator is a measure used to determine the rate of real growth from the rate of nominal growth and is likely to show an easing of the deflationary pressures in the last quarter.
The deflator effectively overstates the deflationary outlook currently as import prices, which have been rising thanks to the stronger oil price, are taken out of the figure, which suggests inflation rather than deflation may be a bigger threat now.
With this in mind, the market is factoring in the potential for the government to state the threat of deflation is all but over, which would be a signal for rates to increase in coming months rather than towards the end of the year as is the official view.
