International | Jul 03 2006
By Chris Shaw
If the Bank of Japan (BOJ) needed any further convincing of the merits of the argument for an increase in official interest rates they have probably received it with the release today of the quarterly Tankan survey of business conditions.
The survey results met expectations, with the key large manufacturers reading coming in at 21, a result equal to the consensus estimate and slightly better than the reading of 20 in the March survey. The result indicates business confidence levels in the economy continue to improve.
Further supporting this view is the expectation for capital spending among large companies to increase by 11.6% this financial year, the highest level since 1990 and a result well above the consensus estimate of a 9% increase.
This sets the stage for an interesting BOJ meeting later this month and lends support to the market view that rates are likely to be increased. The Tankan result follows some strong employment data and an improved inflation outlook, suggesting the Japanese economy has finally beaten back deflation and that an increase in official rates would not bring the economic recovery to a halt.
Adding to the prospects for a rate rise have been recent comments by BOJ board members indicating a growing level of concern with the possibility of an overheating in capital spending, a view likely to be reinforced by today’s strong figures.
The consensus estimate is for an increase in official rates of 0.25%, though with the ruling Liberal Democratic Party only a couple of months away from a vote to select a new prime minister to replace Junichiro Koizumi some in the market suggest any increase in rates could be more modest at around 0.15%.
