This Week’s Economic Reports: The Consumer Price Index and Interest Rates

April 23, 2007
By Ken Worsley

There are some big economic reports coming up at the tail end of this week. On Friday, March consumer price index data will be released. With much anticipation over the return of inflation to the Japanese economy, this will be one to watch. Last month, CPI data dropped 0.1% against February of 2006.

In a write-up published today, Bloomberg is a tad bullish on March CPI data:

Japan’s inflation will probably accelerate as the economy extends its longest postwar expansion, giving the central bank room to raise the lowest interest rates among major economies.

Bloomberg’s survey of 17 economists is predicting a 0.1% rise in core consumer prices (excluding fresh food) in the year ending March 31. The same group of economists do not expect the BOJ to announce an interest rate hike at its April Policy Board meeting, which also concludes this Friday.

I’m not in any position to call the CPI data, though I don’t expect it to move very far. Let’s remember that over the past three months we have seen the CPI move: +0.1% (December), 0.0% (January), and (-0.1%) February. Back in January, when the December data was released, Hiroshi Shirashi from Lehman Brothers was quoted by Business Week as saying:

Given this tame data, it’s really difficult for the bank to explain why it would want to tighten credit next month as domestic prices haven’t improved.

That is, of course, exactly what the Bank of Japan did. Getting to this month, I have to agree with the Bloomberg survey and say that there is no way the BOJ will raise rates this month. With an Upper House election in July that is looking much closer than the ruling party would like it to be, I don’t think the BOJ is in a position to raise rates again at any time during the current ordinary session of the Diet. When that session ends this summer, we may see the BOJ get its window of opportunity between the end of the ordinary session and the beginning of the extraordinary session (which is sure to be called, as the Diet is required by law to hold an extraordinary session after an Upper House election).

One last item on CPI data: Last October, the Bank of Japan projected a 0.5% increase in CPI for financial 2007 (April 2007-March 2008). Kyodo News is reporting that this figure seems set to be revised downward, to 0.3%. Why did BOJ sources leak this on Monday? They must view the revision as serious and want to lessen its impact. Given that the announcement is set to come late on a Friday, the impact would already be lessened a bit. Somebody’s being very careful.

Why the downward revision in CPI projections for fiscal 2007? According to Kyodo: