Bank of Japan Preview

August 9, 2010

Japan’s central bank authorities face mounting pressure to take more concrete action to counter deflation from politicians in the ruling party and the opposition parties alike.  There have been calls for legislation that would weaken the Bank of Japan’s independence.

The GDP deflator in the first quarter of 2010 was 2.8% lower than in 1Q09 and has dropped in the last twelve fiscal years by 13.2% in total.  Consumer prices in the second quarter fell at an annualized rate of 2.4% excluding seasonal food and by 3.2% annualized excluding both food and energy.  It doesn’t help that the yen has appreciated by 38.7% against the dollar from 119.12 at the onset of the world financial crisis in August 2007.

Because the central bank overnight money target was already at a mere 0.5% when the crisis began, the target rate was reduced just 40 basis points, much less than the cumulative decline in the key interest rates of other central banks.  The rate reduction has been supplemented at times by measures to promote lending to firms, but the latest on-year growth rates in M1 (2.0%),  M2 (2.7%), M3 (2.0%), “L” liquidity (1.3%), and bank lending (minus 1.9%) remain anaemic. 

Japanese equities are under-performing other stock markets.  On April 26, the DJIA and Nikkei-225 closed at similar levels of 11,202 and 11,213.  Since then, the Nikkei has lost 14.6% of its value, 3.25 times more than the Dow.  Since the onset of the financial crisis, the Nikkei has slumped 43.8% net, twice as much as the DOW.

Japan announced some disappointing figures in the last two weeks.  Unemployment was at 5.3%, up from 4.9% in February.  Jobs were 1.1% lower than a year earlier compared to a 0.6% drop in the year to March.  Industrial production fell by 1.5% in June, and survey evidence suggests such has stalled this quarter.  Real household spending fell 8.2% at an annualize rate in the second quarter.  Export growth from a year earlier was at 26.2% in June compared to 39.6% in the first half of 2010.  June seasonally adjusted exports were 1.0% lower than in April.  Both the service-sector purchasing managers index of 46.3 and the manufacturing reading of 57.3 were lower in July than June, and the composite PMI was below 50 in both July and June.  A reading under 50 implies contracting activity.  There have been some signs of improvement.  The Shoko Chukin index of small business sentiment rose in July but remained under 50.  The economy watchers index for current conditions did the same.  Consumer confidence recovered a bit last month.  These releases do not fully balance the weakening picture conveyed by other information.

Baseline forecasts by analysts call for nothing heroic like an increase in outright JGB purchases but allow for the chance of more cosmetic gestures to placate the government.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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