Bank of Japan May Forecast Third Year of Deflation (Correct)
The Bank of Japan will probably forecast this week that deflation will extend into fiscal 2011, an indication that borrowing costs are likely to stay near zero.
Consumer prices excluding fresh food, the bank’s preferred gauge of inflation, will tumble 0.5 percent in the year starting April 1, 2011, and economic growth will accelerate to 1.2 percent, according to the median estimate of 15 economists surveyed by Bloomberg. The central bank will release its semiannual outlook on Oct. 30 at 3 p.m. in Tokyo.
Policy makers will say in the report they plan to keep the benchmark interest rate low to foster the nation’s recovery from its worst postwar recession, analysts predict. That commitment, against the backdrop of forecasts for entrenched deflation and a fragile recovery, will quell any investor speculation that the bank unwinding emergency credit measures will lead to a rate increase, said Masaaki Kanno.
“The BOJ will probably highlight that consumer prices will be stuck in negative territory and use that to convince investors that a rate hike is still far, far away,” said Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo.
Eleven analysts said the bank will say this week it plans to stop buying commercial paper and corporate bonds from lenders in December as scheduled because companies are finding it easier to obtain credit.
Fifteen of the 16 economists who gave monetary policy forecasts through 2011 said they expect the key rate to stay at 0.1 percent through the end of 2010 at the earliest. Japan’s borrowing costs have been kept below 1 percent since Sept. 1995.
End Credit Programs
“The central bank will likely decide this week it will end the credit programs” on Dec. 31, said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo. “They can use the meeting to simultaneously show their subdued outlook for the economy and prices while underlining their commitment to a low-rate policy,” quashing speculation of an imminent rate increase, he said.
The asset-purchase programs have been in place since the bank lowered borrowing costs to 0.1 percent in December amid the worst global financial crisis since the Great Depression. It has also been offering lenders unlimited loans backed by collateral, a facility analysts say the bank may extend into next year.
Bank of Japan Governor Masaaki Shirakawa and his deputy Kiyohiko Nishimura said this month the need for the programs of buying corporate debt has diminished as credit markets have stabilized. The bank is committed to keeping borrowing costs “very low,” they said.
Global Recovery
Some central banks are tightening policy as the global economy recovers. Australia this month became the first Group of 20 nation to raise interest rates since the height of the financial crisis and policy makers in South Korea have signaled they will tighten credit to prevent asset bubbles from destabilizing growth.
Japan’s central bank may decide this week to extend the limitless lending initiative to March because the facility is being used by lenders and terminating it may cause borrowing costs in the money market to rise, according to JPMorgan’s Kanno.
Not all economists expect a decision on the programs this month. Analyst Mari Iwashita says the bank may postpone the decision for a month because this week’s gathering will focus on the economic projections.
Remain Divided
“Board members probably won’t oppose ending the corporate debt programs, which are being little used, but they probably remain divided over” the lending program, said Iwashita, chief market economist at Nikko Cordial Securities Co. in Tokyo. “This week’s meeting may not be a good opportunity to make a decision given that the board also wants to focus on their economic forecasts.”
The economy will shrink 3.1 percent in the year to March before growing 1.1 percent in fiscal 2010, according to the median estimate of 16 economists surveyed. Prices will fall 1.6 percent this year and 1.3 percent in the following 12 months, they said.
Shirakawa has said the bank isn’t confident about the strength of the world’s second-largest economy once global stimulus fades and companies replenish inventories. The yen’s more than 5 percent advance against the dollar in the past six months has eroded exporters’ profits, while also made making imports cheaper and contributing to price declines.
Domestic demand is also showing signs of waning. Economists expect the unemployment rate to rise to an unprecedented 6 percent next year. Prime Minister Yukio Hatoyama’s government last week pledged to create 100,000 jobs by March.
“We’ll soon see more signs that the rebound is losing steam and that Japan may slip back into a recession,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. The BOJ’s report “will convince investors that the central bank won’t seek to raise rates until the first half” of fiscal 2011 at the earliest, he said.
Filed under: business by Specialist