Bank of Japan Says Deflation Will Last for 8th Year (Update2)
Bank of Japan Says Deflation Will Last for 8th Year
April 28 (Bloomberg) -- Japan's deflation will last for an eighth year, the central bank said today, making it less likely it will soon end its policy of keeping rates at zero and pumping cash into the world's second-largest economy.
Core consumer prices will fall 0.1 percent in the fiscal year ending March 31 and rise 0.3 percent the following year, according to the median forecasts of the bank's nine policy makers. In their last twice-yearly outlook in October, they forecast prices would rise 0.1 percent this year.
``The central bank will put a seal completely on discussions of policy changes'' this year, said Hiromichi Shirakawa, chief economist at UBS Securities Japan Ltd. in Tokyo and a former Bank of Japan official. ``There may be some chance that the bank will seek a policy shift in mid-2006 at the earliest.''
Governor Toshihiko Fukui has pledged to keep the four-year- old policy until core prices stop falling and they are unlikely to resume sliding. Japan's recovery from a fourth recession since 1991 won't be strong enough to put an end to deflation this year, Shirakawa said.
``It is not certain whether or not there will be occasion to change the present framework of the quantitive easing policy'' in fiscal 2005 and 2006, the bank said today.
The predictions of central bank policy makers compare with a median decline of 0.2 percent this fiscal year forecast by 12 economists in a Bloomberg Survey. Prices will rise 0.1 percent next year, the survey showed.
Price Bubble
Deflation in Japan is a legacy of the 1980s asset price bubble, which drove the Nikkei 225 Stock Average to a peak of 38,957.44 on Dec. 29, 1989. The Nikkei today closed at 11,008.90, down 72 percent from its peak. Japan's land prices have fallen by half from their peak in 1991.
Japan fell into recession early last year as exports faltered and consumer spending stalled. The economy grew at a 0.5 percent annual pace in the fourth quarter.
The recovery may be faltering. Industrial production fell 0.3 percent in March from February, the government said today, compared with a median 0.2 percent increase forecast by economists. Spending by households headed by a salaried worker slid 1.1 percent in the same month, the second month of decline, the government said on April 26.
In today's median forecasts, central bank policy makers predicted the economy will grow 1.3 percent this fiscal year and 1.6 percent next year.
Zero Rates
Policy makers earlier today voted by majority to keep borrowing costs close to zero and to maintain the level of reserves available to lenders at between 30 trillion yen ($283 billion) and 35 trillion yen. Core prices, which exclude fresh food, have risen once since April 1998.
Deflation is lingering as telephone companies including Nippon Telegraph and Telephone Corp. and power providers including Tokyo Electric Power Co. cut prices in response to growing competition spawned by deregulation.
NTT pared charges last October for the first time since it became a private company in 1985. Tokyo Electric also lowered charges in the same month after the government allowed rivals including Ennet Corp. to enter the market.
Falling prices are curbing sales and profits at companies such as Kao Corp., the nation's largest maker of household goods. Profits are being further squeezed by rising costs of oil products, steel and other raw materials.
Bank Lending
``We were aiming to achieve 1 trillion yen annual sales this fiscal year, but we will probably miss the target because of continuing deflation,'' Kao President Motoki Ozaki said on April 21. ``The situation of severe deflation and material cost gains won't change much.''
The Bank of Japan is trying to end an eight-year slide in bank lending and spur growth by flooding the banking system with cash. Demand for loans is still weak, said Hiroki Jinnai, president of Promise Co., Japan's third-largest consumer finance company.
``The recovery in the economy hasn't spread out to individuals,'' Jinnai said in an interview on April 26. ``We can't accelerate on our lending just yet.''
Producer prices rose for a 13th month in March, a Bank of Japan report showed on April 13. The bank's index of prices of energy and raw materials rose 1.4 percent from a year earlier.
Policy makers today predicted that producer prices will increase a median 0.8 percent this fiscal year and 0.3 percent the following year.
Costlier oil has lifted the price of resins used by Koito Manufacturing Co. to make headlights for cars.
``We expect to face a similar risk this fiscal year too,'' Masahiro Otake, the Tokyo-based company's executive senior managing director, said in an interview on April 26.
Excluding the effect of telephone and utility fees, core prices have been rising since September, said Ryutaro Kono, chief economist at BNP Paribas Japan Ltd. in Tokyo.
``Deflation pressure is easing considerably,'' Kono said.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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