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Japan lowers third-quarter GDP forecast

Central bank will have no chance to hike rates until late next year, analysts predict

TOKYO – JAPAN revised down yesterday third-quarter growth, surprising markets that had expected an upward revision and prompting many to predict the Bank of Japan (BOJ) would have no chance to raise rates until late next year.

Soft capital spending saw gross domestic product (GDP) rise just 0.4 per cent in July-September, compared with an initial estimate of a 0.6 per cent growth and lagging behind the consensus forecast for a revision to a 0.7 per cent growth.

‘It’s quite a bad number and shows Japan’s economy is not in really good health,’ said Norinchukin Research Institute chief economist Takeshi Minami.

‘We expect the next Bank of Japan rate hike to come in July-September next year, but the timing may be delayed further.’

Rate-hike expectations have fallen sharply in recent months.

Swap contracts on overnight call rates are now pricing in a less than 20 per cent chance of a rate hike by March. Just two months ago, a rate hike by March was fully priced in.

The Organisation for Economic Cooperation and Development has said the BOJ should not raise rates until the risk of deflation becomes negligible, and it sees no rate hike until 2009.

The weak outlook for a rate rise boosted Japanese government bonds. Ten-year JGB futures rose briefly from a one-month low hit early in the day.

Financial markets expect the credit crisis in the United States and Europe to tie the hands of the BOJ, which has kept its key policy rate at 0.5 per cent since February.

The central bank wants to restore ultra-low interest rates to more normal levels to avoid the risk of overheating, but it has been stymied by weak consumer prices and worries about global growth.

Its effort to raise rates is made more difficult by increasing caution shown by the world’s central banks over the global market turbulence.

The US Federal Reserve has lopped 0.75 percentage point off its rates and is seen cutting them again next week, while the Bank of Canada and the Bank of England cut rates this week.

The downward revision in GDP was largely due to slowing capital expenditure growth, which was marked down to a 1.1 per cent increase from the initial estimate of a 1.7 per cent rise.

Economists had forecast an upward revision to a 1.9 per cent rise.

The revised data also showed domestic demand shrank 0.1 per cent, compared with a preliminary reading of a 0.2 per cent growth.

‘Today’s data showed domestic demand is pretty weak. The economy is relying on external demand and is quite vulnerable,’ said ABN Amro Securities economist Junko Nishioka.

On an annualised basis, the economy grew 1.5 per cent, much lower than a preliminary reading of 2.6 per cent and economists’ median forecast for a revision to 2.7 per cent.

 

Source: REUTERS (The Straits Times 8 Dec 07)

‘It’s quite a bad number and shows Japan’s economy is not in really good health. We expect the next rate hike to come in July to September, but the timing may be delayed further.’

MR MINAMI, an economist, assessing the surprise revision

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