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In the face of lies, damn lies and statistics: What will the BOJ do?

In last week’s edition of its venerable newspaper, The Economist made the argument that the Bank of Japan could be on the verge of raising interest rates, given strong expectation for GDP growth (which turned out to be true) and pressure from the G7 (which was weaker than expected, especially from the influential American side).

The Economist barely made mention of Japan’s domestic fundamentals in its piece, aside from GDP growth. We know that prices have barely risen, household spending is flat, and wages have barely grown (0.1% or 0.2% last year, depending on the source). If interest rates are indeed a tool intended to keep inflation in check, why raise them now, when there is no apparent inflationary pressure in Japan?

The Economist argues that the widespread practice of carry trading (estimated at a value of $1 trillion) is one of the gravest threats to the world economy, as it nearly did massive damage in 1998, and is thought to be much larger now. One of the troubles, of course, is that much of the carry trade (which involves assuming debt in a currency with a low interest rate - such as Japan’s, and then buying assets in another currency with a higher rate of returns) is done by hedge funds, uses complex derivatives, and is thus off the books.

Well enough. I was cynical (to say the least) about Japan’s 4.8% reported quarterly GDP growth when it was announced. However, the New York Times has now come out and said that the Japanese Cabinet Office’s statistics on both GDP and household spending might be misleading, and that no hike in interest rates is justified. Takahide Kiuchi, a senior economist at Nomura Securities in Tokyo, weighed in with this quote:

Consumer spending remains stagnant. These growth figures don’t change the economy’s overall outlook. There’s nothing here to justify a rate hike.

True enough. Other economists have said that the government’s claimed 1.1% raise in household spending is due to faulty data and misleading survey techniques. You don’t say…

Now things get interesting. Is the data being set up to allow the BOJ to raise rates? Or will political pressure remain on the BOJ to hold them steady?

And, since when is there an empirically verifiable connection between interest rates and foreign exchange rates?

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