Monday, October 31, 2005


Japan Longs For Inflation

Bloomberg has the latest on the situation in Japan. "Japan's central bank said a seven- year bout of deflation will end in the year to March, increasing the chances the board will raise interest rates from almost zero. The chances of a reduction in the amount of cash pumped into the economy and higher rates 'will increase over the course' of next fiscal year, the bank said in a statement."

"A return of inflation will support growth in the world's second-largest economy, which has had four recessions since 1991, by allowing companies to raise prices, boost earnings and increase wages."

"Deflation in Japan is a legacy of the bursting of asset price bubbles in the early 1990s, which dragged down equity and real estate prices by about 75 percent. The bubble lifted the Nikkei 225 Stock Average up to a record 38,957.44 on Dec. 29, 1989."

"'Just as land price declines are easing, the end of deflation will help cut bad loans and that's going to feed into the entire economy,' said Youichi Yanai, chief fund manager who oversees the $28 billion at the Bank of Tokyo-Mitsubishi Ltd."

"The central bank first adopted the zero rate policy in March 1999. It raised rates in August 2000 in the face of government opposition, saying the economy had recovered sufficiently to cope with higher borrowing costs. Seven months later it was forced to cut rates again and adopt the quantitative easing policy following the slump in global growth that accompanied the bursting of the Internet technology bubble."

"'The Bank of Japan would never, ever want to repeat the same mistake,' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. 'They want to avoid by all costs being blamed again for a deterioration resulting from a policy change.'"

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