Mild Deflation Persists

The yen fell yesterday against the dollar after Chief Cabinet Secretary Shinzo Abe and internal affairs minister Heizo Takenaka both stated that mild deflation persists in Japan. Commentators are speculating that the government may be just trying to delay an earlier end of the BOJ's zero-rates policy, but accept that there is some truth the pace and degree of the forceast increase in prices is still slow (the BOJ forecast in its last semi-annual report that Japan's consumer prices will rise for the next two years and the economy will keep expanding).

he yen dropped to 114.20 per dollar as of 7:33 a.m. in London from 114.11 late yesterday in New York, when it reached 113.84, the strongest since Jan. 16. It traded at 143.19 versus the euro from 143. It will move between 113 and 116 yen next week, Saito said. The dollar was at $1.2553 per euro from $1.2534 after yesterday reaching the lowest since Sept. 5.

Japan's core consumer prices, which exclude food, gained 0.5 percent in March from a year before, the statistics bureau said in Tokyo today, below the median forecast for a 0.6 percent increase. Prices gained for a fifth month and rose 0.1 percent in the year ended March 31, the first gain in seven years.

Abe told reporters at a regular press conference in Tokyo today the government would need to watch price trends to determine whether they are sustainable. Takenaka said the Japanese economy is still in mild deflation.

`Sentiment is Shifting'

The yen is still heading for its best week against the dollar since mid-March after the G-7 called for faster regional currency appreciation and a Japanese government report showed economic growth continues to pick up.

The currency has risen 1.9 percent this week after G-7 officials April 21 said it's ``critical'' for Asian countries, especially China, to allow currency gains to ease a reliance on exports to fuel growth.

``Sentiment is shifting toward yen-bullishness,'' said Akifumi Uchida, a deputy general manager of financial markets at Sumitomo Trust & Banking Co. Ltd. in Tokyo. He said the yen may rise to 113.50 against the dollar today.

Japan's industrial production rose as manufacturers increased output in anticipation of higher domestic and overseas demand. Production climbed a seasonally adjusted 0.2 percent in March, the first gain in three months, the trade ministry said in Tokyo today. The result exceeded the 0.1 median forecast of 39 economists surveyed by Bloomberg News.

`Essentially Hawkish'

Japan's central bank March 9 ended a five-year policy of pumping money into the economy. It kept rates close to zero percent at a meeting today, judging five months of rising consumer prices as insufficient to justify raising borrowing costs for the first time in more than five years.

The BOJ's forecasts indicate the central bank considers Japan's economy, after three recessions since 1991, is becoming resilient enough to withstand higher borrowing costs.

``It still looks like the first rate hike is months away, but the BOJ looks to be signaling its intention to move this year,'' said Adrian Foster, a currency strategist at Dresdner Kleinwort Wasserstein. ``History of these watershed policy shifts in Asia is that the policy makers move earlier than the market expects.''

Dresdner forecasts the yen to rise to 112 per dollar in six months and to 105 yen by year-end, Foster said.

Misread the Statement

The U.S. currency also strengthened today after Federal Reserve Chairman Ben S. Bernanke and Hiroshi Watanabe, Japan's vice finance minister for international affairs, yesterday both said investors misunderstood the G7 statement if they believed it called for the dollar's decline.

The statement ``didn't say that a depreciation in the dollar is needed,'' Watanabe said in Tokyo. ``Gains in the yen and euro signal that the market has misread the G-7 statement.''

Japanese officials may be concerned a stronger yen will hurt the country's exports and delay the world's second-biggest economy emerging from deflation.

``The Japanese make these kind of remarks whenever the yen strengthens,'' said Mitsuo Imaizumi, a deputy general manager of fixed-income sales and marketing at Daiwa Securities SMBC Co., a subsidiary of Daiwa Securities Group Inc., Japan's second- largest brokerage. The yen will move between 113.80 and 114.60 against the dollar today, he said.

``The G7 supports a market determined dollar, not a managed dollar,'' Bernanke said. Reports that the G7 discussed a managed depreciation of the dollar were ``not correct,'' he said.

``He's concerned that a dollar decline may heighten inflation expectations,'' Imaizumi said.