Rising prices point to end of zero interest rates

PUBLISHED : Saturday, 27 May, 2006, 12:00am
UPDATED : Saturday, 27 May, 2006, 12:00am

Japan's consumer prices rose from levels of a year ago for the sixth month last month, supporting the view that deflation has receded and the Bank of Japan will end an era of zero interest rates as soon as July.

Such expectations were boosted as Tokyo area price data, announced a month before nationwide figures, were stronger than expected for the month, sending short-term debt prices tumbling.

The nationwide core consumer price index, which excludes prices of perishable food, rose 0.5 per cent last month from April last year, matching the market's consensus forecast and showing the same inflation rate for a fourth month.

It was also the sixth month of a reading above zero after a flat reading in October.

The Tokyo area core consumer price index (CPI) also gained for the fifth month. It was up 0.4 per cent this month from a year earlier.

Japanese government bond prices fell after the data as the market focused on the Tokyo figures.

'The selling in shorter maturities shows that the market is getting more nervous about a rate rise,' said Masuhisa Kobayashi, the chief government bond strategist at Barclays Capital, adding that market expectations for a rate rise in July were rising.

But government officials were cautious about the country's price environment.

Finance Minister Sadakazu Tanigaki said prices were improving but that it was too early to declare victory over deflation.

'We can't say that we've overcome deflation yet, but it's a fact that conditions are improving,' he said after a cabinet meeting.

Chief Cabinet Secretary Shinzo Abe noted the CPI excluding special factors such as oil costs was still hovering around zero.

Nationwide CPI - stripping out the effect of food and oil prices - rose 0.2 per cent last month from a year earlier.

Separate data from the Bank of Japan showed the corporate services price index fell 0.4 per cent from March and was down 0.3 per cent from a year earlier.

Bank of Japan governor Toshihiko Fukui last week quashed speculation that the bank might raise rates next month, but most in the market believe the central bank will pull the trigger as early as July.

It expects the core CPI to rise 0.6 per cent during the year to next March and gain 0.8 per cent in financial 2007-08. A sustained rise in prices would prompt the bank to consider lifting short-term interest rates from zero, although it has said any rate rise would be gradual.

'While deflationary pressure has certainly receded, we're not seeing any runaway inflation that calls for rapid interest rate increases,' said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute.