FOREX TRADING

Deflation Continues In Japan

Japan’s core CPI rate has declined for 11 straight months. The core CPI declined by 1.3% in January. The decline in January CPI confirms that deflationary pressures continue in Japan. The Bank of Japan (BOJ) has been under intense pressure from the Japanese government to take action to combat deflation and boost growth. At an emergency meeting in December the BOJ elected to ease monetary policy. The BOJ increased its lending operation to ¥10trln offering fixed rate loans to commercial banks at 0.1%. Last week the BOJ elected to ease monetary policy again and double its short-term lending operation to ¥20trln. The increase in the lending operation is unlikely to have any major impact on deflationary pressures in Japan. The Japanese government has called on the BOJ to do more to combat deflation and would like to see the BOJ buy Japanese bonds. BOJ purchase of Japanese bonds would effectively be printing of money and could boost the money supply and slow deflationary pressures. BOJ officials have rejected the government’s call for the purchase of more bonds. The BOJ policy board was split at last week’s meeting and the split decision to expand lending operations reflects concern by some of the BOJ board members that it’s more difficult to justify easing monetary policy as Japan’s economy shows signs of improvement. Recent Japanese economic data shows that exports posted the third biggest monthly gain on record last month and imports rose for the first time in 15 months. Japan’s manufacturing and business confidence has been rising and unemployment posted a modest decline. Q4 GDP however rose at a slower pace reported at 3.8% compared to 4.6% in the preliminary report. Japans quarterly tankan business sentiment will be released on April 1st. The tankan report is expected to confirm improvement in Japan’s business sentiment for the fourth straight quarter.

(more…)