BOJ Roundup: Interest rates, GDP and inflation projections, and corporate versus household recovery

October 31, 2007
By Ken Worsley

The first item in this roundup is pretty much a non-item: The Bank of Japan policy board voted 8-1 today to keep the uncollateralized overnight call rate at 0.5%.

The bank, however, did release a slew of other information. In its Outlook for Economic Activity and Prices report, the BOJ starts off by sticking to the opinion that “Japan’s economy is expanding moderately” despite the fact that, “The pace of improvement in the household sector, however, has remained slow relative to the strength in the corporate sector.”

The corporate sector, however, has been unusually strong; stronger that it has been in 16 years. On Monday, the National Tax Agency announced that income at Japan’s corporations totaled 57.08 trillion yen in the 12 months to June 30 of this year. That figure was 13.3% higher than last year, and surpassed the previous record of 53.12 trillion yen, which was set in the 1990 tax year.

Granted, there are more workers in the economy now than there were in 1990, and we would assume that they’re making at least as much per head - more on this to come in another post. What struck us about the NTA’s numbers, however, was that only 32.4% of those firms were operating in the black. Getting to the other end of the BOJ’s statement, the NTA says that wages fell for the ninth straight year in fiscal 2006.

More on that report will have to come in a future post. For now, it’s back to the BOJ. After the above statement, the bank says that although expansion is expected to continue, “there are uncertainties regarding overseas economies and global financial markets.” How this is ever true…

In a separate report issued today, entitled Recent Developments of Japan’s External Trade and Corporate Behavior, the BOJ tells us:

Japanese firms have thus dealt with globalization fairly well, and this has enabled the domestic economy to continue expanding over a long period of time. Globalization, however, also comes with a variety of competitive pressures, including those from the capital markets…Attention should be paid to the possibility that the Japanese economy is now more susceptible to developments overseas, since it has become more closely linked to the global economy. With the population declining and increasingly aging, however, the Japanese economy needs to continue its efforts in capturing global demand in order to keep on generating income and to maintain its growth potential.

That last part is very, very true. We are seeing more and more Japanese brands attempt to move into the global marketplace and establish themselves alongside time-honored global brands. The question is whether or not this can be done on a larger scale in the retail and services industries.

That, of course, is a topic for a book of its own.

Two final points on the Outlook for Economic Activity and Prices report. First, we see the BOJ forecasting something in the neighborhood of 2.0% GDP growth over fiscal 2007 and 2008. Again, I wonder where the ambition went, though I can’t claim I predict it to be over 2.0%.

Second, despite one policy board member still voting for an interest rate hike, the BOJ is now forecasting zero inflation in FY2007 and 0.4% in FY2008. The FY2007 projection is a downward revision of the 0.1% rise that had been forecasted in April.

Yet, despite all that, the BOJ holds that it will stick to their policy of gradually raising interest rates. Of course, the bank doesn’t say how gradual they mean by “gradual”, which essentially means, “Someday.”

Given that interest rates really can’t go back down, this is one projection the BOJ seems to have nailed on the head.

The Nikkei has published a useful chart of BOJ projections here.

Filed Under Bank of Japan, Economic Reports, Interest Rates, Labor and Wages, Monetary Policy

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