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Japan October inflation bucks downtrend

Markets cheered by other positive news but small, mid-size firms still hurting

IN TOKYO

JAPAN received more positive economic news yesterday when it was reported that consumer prices rose for the first time in 10 months during October, while household spending rose by 0.6 per cent during the same month. This came on the heels of data this week showing that October industrial production rose by an unexpectedly strong 1.6 per cent to its highest ever level.

The news pushed the Nikkei 225 stock average up a further 166.3 points or 1.1 per cent to 15,680.93 where it is well off the floor it hit following recent widespread falls in leading stock markets. Investor sentiment was also buoyed by the fact that the yen slipped further against a recovering dollar yesterday, to under 110, thereby bolstering prospects for exporters.

The rise in consumer prices reflected higher energy and food costs and economists predicted further rises in coming months. Nevertheless, with consumer price inflation running at only 0.1 per cent on an annualised basis, the Bank of Japan has little cause to raise interest rates and the central bank’s short-term policy lending rate is expected to remain at its current level of 0.5 per cent until well into next year.

Economics Minister Hiroko Ota said yesterday that the economy is still moving towards the end of deflation, although price moves need to be monitored carefully. ‘We are watching for the possible negative impact of price rises in food and crude oil on consumer sentiment and small and mid-size company earnings,’ Ms Ota added.

Another reason for continuing caution by the BOJ, analysts said, is that the unemployment rate remained at 4 per cent in October, with the number of jobs per applicant declining. ‘Rising raw material costs are hurting business sentiment at medium-sized and small companies, which are unable to pass rising costs on to their customers. That’s why the job market is losing momentum,’ said Seiji Adachi, senior economist at Deutsche Securities.

The need for caution is also indicated by the fact that housing starts fell by 35 per cent in October from their level a year earlier, analysts said. The Ministry of Land, Infrastructure and Transport reported the fourth consecutive monthly decline yesterday following a 44 per cent drop in September. The plunge was due to tighter construction rules adopted by the government in June, which also resulted in a 23 per cent drop in orders received by major construction firms in October.

 

Source: Business Times 1 Dec 07

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