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BOJ to finally call the bluff in August?

July 18, 2007
By Ken Worsley


I’ve been saying for a bit now that my odds on a rate hike in August are 60 percent. According to the Nikkei, the Cabinet Office’s Economic Planning Association polled 32 private sector economists and says that 70% of them believe that such a move will be taken by the Bank of Japan next month.

The poll found that April-June and July-September quarter CPI projections were negative. The October-December quarter was projected at a 0.13% rise.

Anyone want to talk about a rise in the consumption tax yet? Better get this rate hike in now, then. I’m moving up to 65 percent.

Filed Under Bank of Japan, Interest Rates, Monetary Policy 

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Comments

4 Responses to “BOJ to finally call the bluff in August?”

  1. claus vistesen on July 19th, 2007 6:43 am

    Hi Ken,

    Well …

    This is really a close call I think. Personally, I think that the June data on consumption and inflation will be crucial and unless they show an improvement on May I feel that the BOJ will face serious difficulties raising. The point as ever is that while the BOJ has subtlely but surely changed discourse saying the rates could go up alone on the expectations of future inflation they WILL be taking a leap in the dark by raising amidst lingering deflation, and they know this I imagine.

    However, as you also note markets are now sure that August will see 0.75% and given what happened in February when markets were snubbed on the timing of the hike to 0.5 my guess is that the BOJ will go very far to come through on this one but remember also that this is essentially also a tug-of-war between the MOF and BOJ.

    Not a close call this and it is clearly much more close than the 70% balanced market call you cite above.

    Keep up the excellent work

    Claus

  2. Ken Worsley on July 19th, 2007 9:51 am

    Claus, thanks for the comment. I have more to say on it, but for now:

    Some 71.8% of the public expect prices to increase over the next 12 months, according to the June standard-of-living survey released Wednesday by the Bank of Japan.

    Let’s see if they even try to make use of that one…

  3. Ivan Kitov on July 20th, 2007 4:19 pm

    It would be a good test for the “inflatiion expectation” approach.
    If CPI is below zero the next 12 months then even higher expectations can not help overcome deflation.

    There is an interesting study of the Japanese CPI
    refered in WSJ blog
    http://blogs.wsj.com/economics/2007/07/19/japans-inflation-may-be-lower-than-figures-indicate/

    which says that inflation in Japan is highly overestimated - by 0.8 pp.

    If to add problems with accuracy as presented by Shigenori Shiratsuka
    http://www.imes.boj.or.jp/japanese/all99/me17-3-3.pdf

    one can guess that the BoJ decision is based on somewhat flawed assumptions .
    In this case it could be random enough.

  4. Ken Worsley on July 20th, 2007 6:23 pm

    Thanks Ivan…great links!

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