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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: RealMuLan who wrote (26290)3/25/2005 2:05:34 AM
From: mishedlo   of 116555
Key Japan consumer price gauge falls at lowest rate in 5 yrs in FY04
[What a screwy world - they are begging for inflation while everyone else is in fear of it - mish]

Friday, March 25, 2005 6:10:07 AM

TOKYO (AFX) - The core consumer price index (CPI) for Tokyo, a leading indicator of price trends throughout Japan, fell 0.2 pct in fiscal 2004, the sixth straight year of decline, the government reported, showing the world's second-largest economy remains dogged by deflation. But the rate of decline narrowed for the third straight year, and to the smallest level in five years, showing the deflation at the heart of Japan's economic woes of recent years has become far less troublesome

The rate of decline has slowed steadily from 1.1 pct in fiscal 2001 to 0.9 pct in fiscal 2002 and 0.3 pct in fiscal 2003. Yet despite rising prices for oil and other commodities, and a broad-based recovery which has fueled a big jump in corporate profits, significant improvement in labor market conditions and early signs of a rise in personal incomes, the government and private economists do not expect Japan to emerge from deflation anytime soon. Due in part to deregulation, which is causing prices to fall for items like telephone service and electricity, Japan is expected to continue experiencing modest deflation, meaning the Bank of Japan (BoJ) may maintain its ultra-loose credit policy for months to come -- and possibly into 2006. "The government must keep up efforts with the BoJ to overcome deflation," Kyodo News quoted Finance Minister Sadakazu Tanigaki as telling reporters, vowing to accelerate structural reforms to spur economic growth while asking the central bank to maintain the current policy framework

Private economists were quicker to claim the data showed Japan might be winning its battle with deflation, though few expect victory to be declared anytime soon. "I think the real economy is gradually moving out of deflation, as the longer-term trend of the CPI shows that the pace of price declines is slowing," said Takehide Kiuchi, senior economist at Nomura Research Institute

Both the finance minister and Kiuchi were speaking after the Ministry of Internal Affairs and Communications early today released CPI data for March and fiscal 2004 for Tokyo, and nationwide data for February

The core consumer price index for Tokyo, widely watched because it's available a month earlier than the nationwide data, actually rose 0.4 pct in March from the previous month. Year-on-year, though, it fell 0.5 pct, the 66th straight monthly decline

The core rate excludes volatile fresh food prices, and thus gives a clearer indication of the underlying trend of price changes

Including fresh food prices, consumer prices in Tokyo also rose 0.4 pct month-on-month, but fell 0.3 pct from a year earlier

On a nationwide basis, the core CPI -- the BoJ's primary measure of price trends -- fell 0.4 pct in February from a year earlier. The Bank of Japan has declared that it will maintain its ultra-easy credit stance, under which it seeks to keep short-term interest rates near zero in an effort to stem deflation, until the core CPI remains above zero for a prolonged period, shows no signs of dropping and the economy is steadily growing

The index for overall prices nationally in February fell 0.2 pct month-on-month, and by 0.3 pct from a year earlier

Looking ahead, virtually all economists expect Japan's economic recovery to eventually haul the nation out of deflation, but are widely divided in predicting how soon before that happens. Kiuchi of Nomura Research said the consumer price index may fall at rates of 0.5 to 0.6 pct from year-earlier levels throughout 2005 because of the effects of deregulation, before finally turning positive next year

"The other major factor that could affect the CPI is higher crude oil prices," Kiuchi said. He said it is becoming more difficult for Japanese companies to absorb rising oil prices by keeping down labor costs, as many are now hiring new workers

Tatsushi Shikano, an economist at UFJ Research Institute, cited other reasons for arriving at the same view of deflation

"Although the data confirmed that deflation is easing, it will be difficult for the core CPI to begin rising, especially because macro-economic activity in Japan is deteriorating," Shikano said

Earlier this week the government reported that Japan's merchandise trade surplus fell again in February, raising concern over whether an expected pickup in domestic demand will compensate for a prolonged decline in external demand, long the major driver of economic growth. But other economists are more optimistic about the outlook for the Japanese economy, and thus for an early end to deflation

"We are relatively optimistic about the economy and therefore think that CPI deflation will come to an end toward the end of 2005," Kyodo News quoted John Richards, Japan strategist at Barclays Capital Japan Ltd, as saying

"This is much earlier than the broad market consensus, and implies an earlier end to zero-interest-rate policy," Richards said
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