Q&A on Japan

In the context of Francois Guillaume's pertinent comments and questions to my review and preview note and in the light of today's much surprising Q4 GDP release I have chosen to present my comments and answers to Francois' questions/comments above the fold à la Q&A.

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1) GDP much higher than expected...how do you explain that ??

I want to focus on two issues here. First of all, the current figures are preliminary and in this light I expect to see a downward revision in March. In this light, we need to realize I think that given the incoming stream of data we have seen from the three months of Q4 2007 this figure of 3.7% (Q4 YoY) is pretty hard to justify. For a reasonable take on the whole situation Graham Davis from the Economist Intelligence Unit had a good overview I think in his interview with Bloomberg (can’t hyperlink to the clip I am afraid). Also, we should note I think a comment made recently by Takehiro Sato over at Morgan Stanley’s GEF …

Incidentally, in Japan’s case, quarterly GDP data are too volatile to be a suitable criterion for calling the economic cycle. This is clear from the GDP trend in past recessions. Yet while GDP has at times been positive when the economy is in retreat, industrial production has consistently mirrored the downward path of the economy. It seems reasonable to say that the critical factor for assessing the economic cycle is simply the direction of industrial production.

However, if we accept the figure as it is I still don’t think that the underlying path of the Japanese economy has changed even if the level seems somewhat too high. Let me consequently highlight some of the snippets from Bloomberg’s report on the break-up of the GDP components as well as the much more detailed break-up provided by Edward vis-à-vis the official estimate provided by the Cabinet office. What thus seems clear to me is that although consumption rose in the last half of 2007 net exports and by derivative capex continues to drive forward Japan on the margin. Remember that we need to talk about levels here too since private consumption commands a much larger share in the Japanese economy than does both investment and net exports. Let us try to annualize the quarterly growth rates in both real and nominal terms which yields a quite different picture. In real terms Japan thus grew 1.8% through 2007 and in nominal terms we are down to a rather un-impressing 0.6%. Particularly for Q4 the figures are 0.9% and 0.3% for real and nominal growth rates respectively. In this way, the GDP deflator is a welcome alternative to the CPI index in that it accounts for the change in prices relative to what consumers actually buy in the measurement period. Thus note in passing the following from Bloomberg …

Rising oil prices may have boosted growth in real terms. The GDP deflator, a broad measure of prices used to calculate real growth from nominal, fell 1.3 percent from a year earlier, the biggest drop since the first quarter of 2006. The deflator is adjusted downwards when oil prices rise. In nominal terms the economy grew an annual 1.2 percent in the fourth quarter.

I am going to discuss this more below since inflation measurement is clearly one of those areas where data mining and basket building can be used to construct just about any kind of number you would like. In this way, all these kinds of inflation adjusted growth rates etc need to be taken with a pinch of salt. In conclusion on the GDP figures I think the following is important to note. First of all, this is good news since it indicates, all things equal, that Japan has defied at least some of the claims that a recession/slowdown is imminent. However, I am not sure how much valuable information we can reasonably derive from the figures at this point. First of all, I think these figures are in for a haircut once they are subject to revision. Yet, even if we rely on them such as they are I think that it is reasonably clear how for example the value component of energy prices might have pushed up the real GDP to unrealistically high levels if we consider the underlying trend.

2) Inflation: see my previous posts: CPI is just a price index. Its definition is very different from a country to another. Change in the index & methodology would give a total different picture. Most important is the trend of the index itself, and the recent trend is up. It’s ridiculous to speak of deflation any more. CPI has been ranging from -2% to 1% in last years. It doesnt make a lot of difference. Asset-prices are more important: Nikkei is still nearly more than 80% off 2003 lows, real estate in central Tokyo as well despite being off its highs probably by 20% at least.

Unfortunately I am not sure about which posts Francois is referring to here but nevertheless he fires off a lot of reasonable questions here. First of all, I completely agree with the point on methodology. Since the CPI is based on a basket which can be changed and re-weighted and since the CPI may or may not include headline inflation what we end up with is a veritable mind field of potential ‘best practices’. This also means that whatever the picture you want you can rig the data so that your specific view of the world emerges. I don’t think however that this is what I have falling victim to in my analysis of Japan. In my opinion, the price movements in Japan both in the most recent period as well as in 4-5 year perspective show two things. First of all, there is the overall level of inflation which has been very low and essentially negative. This, coupled with the very aggressive monetary regime put in place to normalize conditions indicates I think that there is indeed ‘something funny’ about consumption and domestic demand in Japan and this is what has led me to conclude that the whole price edifice in Japan has something to do with the population structure of the country. Secondly and in the more immediate context the recent divergence between input and output prices further support my claim that price dynamics in Japan do not follow the theories we can discern from macroeconomic textbooks and traditional empirical studies. Moreover, it obviously suggests that the equality often exclaimed in the financial press between the return to inflation and economic recovery is wrong.

Now, all this leads me to disagree with Francoise when he says It doesnt make a lot of difference. I think it does although I do agree that asset price deflation/inflation is extremely important too. In this respect the Nikkei is mentioned being considerably off its low levels of 2003 as well as those much debated Tokyo real estates have seen hefty increases in price. Both these points are very important to take aboard I think and merits, at least a bit, that Japan has moved on. Of course, the most recent developments in the Japanese housing sector suggest that the construction/residential sector in Japan might very well be in for a more difficult future but let us leave this point here. However, what about another kind of asset in the form of human capital? How does the value of this asset stand? Well, as we have observed one of the recent trademarks of the Japanese labour market has been a consistent decline in wages and the transition from a labour market of full time workers to part time workers (on the margin of course). Since aggregate national wages essentially can be seen as a measure/reflection of the national labour productivity (either absolute or per/hour) what does this imply for the general price level in Japan? As can be seen, this readily becomes rather complicated. Another reason as to why inflation matters has to do with the workings of a modern economy is monetary policy. Quite simply, deflation or next to no inflation has implications for the workings of monetary policy as well as it has implications for the consumption dynamics of the society. More importantly, we have seen the condition of deflation in Japan and subsequent low interest rates have had notable externalities on the global economy. So, I would say that it does indeed matter.

3) Monetary policy. I fear there could be a big misconception on USD buying interventions. MOF as you know is running a hell lot of debt. It is short Yen cash. But it seems to me that most of the FX intervention is executed by BOJ, but on behalf of the MOF. So when MOF buys USD, it needs to borrow even more JPY. But with the end of Quantitative easing, they can’t issue as many Financial Bills to back them as they would like to (because BOJ would basically buy an unlimited amount of them @ 0% before.) I think that with the deterioration of public finances, it becomes harder to do such intervention. So I see just a lot of talk, not much more.

Here I stand corrected. Consequently, I had not, in my analysis of the JPY and subsequent potential for intervention, thought about the perspective Francois presents here. It is very interesting I think. Now, for some of our readers this may seem a bit complicated but what Francois is saying is simply that absent quantitative easing/ZIRP it becomes more ‘expensive’ for the MOF to intervene since they cannot be sure that they are able to offload the subsequent debt. Of course, this also paves the way for a rather perverse scenario. Consider thus that the JPY is driven largely by risk sentiment at the moment. If the BOJ sees it fit to lower rates during the course of 2008 and perhaps even returns to ZIRP we could expect the JPY to shoot up given we accept the current market dynamics. Note in passing here that this morning’s GDP release has been followed by a depreciation of the JPY which shows the disconnect between the fundamentals and the JPY. In this way, a return to ZIRP or just a drop to 0.25% could in this context be followed by an increased in the pressure to intervene. Of course, this is not a plausible scenario at this point but still goes to show the potential dynamics as we move forward.

4) JPY everybody I talk to is bullish on the JPY... maybe that is why it is so sticky now...but its way off its lows against many crosses.

As I have said above and also in my recent review and preview the JPY remains wholly disconnected from the fundamentals of the Japanese economy. I concur with Francois that the sentiment on the JPY at the moment seems to be bullish given the general risk sentiment in the markets. At time of writing it is sniffing at 108+ which is outside the recent weeks’ range of 106-107. It is difficult to see where it goes from here. I am expecting this ‘stickiness’ theme to dominate since it is unclear I think whether market conditions would favor a move below 105 or upwards to 110.

5) Long term interest rates... the credit markets have imploded in less than a year. My prediction is for a failure of a big govt bond market in 5 to 10y time. Japan would be an obvious candidate. In that scenario, long term interest rates are heading HIGHER. Just people will be tired to be stuck with low interest rates when there is inflation everywhere. But in the short term, as the asset-bubble is deflating, and this process is not over, global govt bonds will remain for some time the asset of choice, by default.

Now, this is very interesting in my opinion. Whether or not we will see a failure in a government bond market is an open question subject to one of those rather long term falsification clauses. I have argued before that in the context of countries such as Japan and Italy it will, at some point, cease to make sense in ‘rating’ the sovereign debt market based on the same criteria as you treat e.g. India, the US etc. Quite simply, this will become unfeasible as we move forward since this would push these countries into a technical default. As Francois alludes this may of course come to pass some way or another not because of the rating agencies themselves but rather because with inflation the nominal yield may become too unattractive. Note also that once we enter this discussion we also enter a whole gamut of issues in the context of Japan in the sense that the BOJ and the MOF is in a double bind. On the one hand the BOJ faces external pressure (those externalities again) to raise or more aptly to normalize rates but it finds this difficult because deflation still dominates the general price level. Moreover, a transition towards whatever the interest level we assert to be normal would most likely drive up the value of the JPY and thus further lead to deflationary pressures. We should also consider the simple points that as interest go up the debt becomes more expensive to service and in this way the MOF has a distinct interest in keeping interest rates down. Within this framework headline inflation pressures are of course simply a further pinch it seems not least because of the reasons mentioned by Francois.

This topic on sovereign debt and long term interest rates is very important I think but for now I think that I will lower my guns. Thanks for Francois for the comments. Needless to say, here at JEW (and at Alpha.Sources) we always appreciate to be challenged on our views and opinions.

Japan Q4 2007 GDP Preliminary Estimate

Well the preliminary Q4 GDP numbers are now out and they are definitely better than expected. Japan's economy grew at an annualised rate of 3.7 percent in the last quarter of 2007, and this was at least double the pace most economists were expecting, as strong business investment and exports to Asia and Europe helped the Japanese economy weather the U.S. slowdown. Gross domestic product in the three months which ended Dec. 31 accelerated from a 1.3 percent annualised rate expansion in the third quarter, according to data released by the Japanese Cabinet Office in Tokyo today. We need to be a little carfeul in using these annualised rates, since they are derived by simply multiplying quarterly rates by 4, but still whole year growth for 2007, according to the first preliminary estimate, was 2.1%, which compares with 2.4% in 2006 and 1.9% in 2005, so the final result is not at all - by current Japanese standards - a bad one.



On a quarter-on-quarter basis, growth in Q4 was at 0.9%, up from 0.3% in Q3, and the -0.4% contraction in the second quarter.So it is clear that, despite all the negative sentiment we have been faithfully recording here, the Japanese economy actually accelerated in the second half of 2007 and this despite the dramatic slowdown in residential housing. The big question - as Francois reasonably asks in comments to Claus's last post - why?

I freely admit these results have surprised me, as I was expecting something significantly worse. But I suppose we should to some extent have seen this coming. Growth in Q2 was very bad, and the rebound in Q3 was relatively weak, yet all those export numbers we have also been recording over the months - and the surprise upside in consumption in December - should have been some sort of indication. Plus government spending in the last quarter seems to have been pretty strong. Lets take a look at some of the details.

I have made the following charts on a simple cut-and-paste basis from the PDF summary file provided by the cabinet office, but I think they may help people to see what is happening at a glance, since they show either the percentage contributions of the more important components to growth or the quarterly percentage growth rates (depending), and hence may make what are otherwise pretty dry numbers a bit more real. Firstly the evolution in real quarterly GDP growth (all the charts are based on real, not nominal, data).



If we now come to look at the comparative role of exports and domestic demand, we can see that while the role of exports continues to be strong (and is much better in both Q3 and Q4 when compared with Q2) the share was actually down slightly on Q3, so exports aren't the whole story here by any means, since domestic demand moved from being a negative 0.4% drag in Q3 to a positive 0.5% boost in Q4.



Household consumption was up slightly, contributing 0.2 percentage points to growth:



The decline in residential construction continued and even accelerated across Q4 (residential construction declined by 9.1% over the previous quarter when it declined by 8.3% from Q2, although the rate of decline may well have been slowing off in November and December).



Private non-residential investment (or fixed capital formation) grew strongly in Q4. Could we interpret this as a response to the stronger than expected performance in exports in the face of the US slowdown?



But perhaps the biggest surprise of all comes from government consumption, which grew 0.8% over the previous quarter, contributing 0.1 percentage points to quarterly growth.




So to go back to Francois original question, about how to account for the Q4 performance, could we say some small improvement in household consumption, sustained export growth, an increase in government consumption (perhaps undertaken to offset the impact of the housing contraction), and a large rise in investment, as I say possibly the outcome of the strong performance in exports and the reasonable domestic consumption outcome leading people to be a wee bit more optimistic about the immediate future.

And here's a bit of news I just saw in Bloomberg that may help explain some of what is happening on the exports front:

Japan's shipments of construction machinery may rise 9 percent to a third straight annual record next fiscal year as building and mining booms in Asia drive demand for earthmovers built by Komatsu Ltd. and its rivals.

Shipments of excavators, tractors, cranes and other construction machinery may climb to 2.6 trillion yen ($24 billion) in the year starting April 1, according to estimates released by the Tokyo-based Japan Construction Equipment Manufacturers Association today. Shipments in the year ending March 31 may reach 2.4 trillion yen, 15 percent more than the previous year.

China's effort to develop its hinterland, oil-funded construction booms in Russia and the Gulf nations, and mining projects in Southeast Asia have countered the housing recession in the U.S., the world's biggest market for earthmoving equipment. The demand has prompted Komatsu and Hitachi Construction Machinery Co., Japan's biggest makers of earthmoving machinery, to expand factories and boost production.

Review and Preview on Japan

(Cross-post from Alpha.Sources)

I realize that I am moving in a bit late with this but the data I use to input in my analysis only recently came out for December 2007. More generally, this post is going to be quite big since I have a lot of things I want to get off my chest this time around. I have two main areas of focus I want to cover.

• Firstly I want to finalise my analysis of Japan in 2007 with the December data for consumption expenditures and prices.

• Secondly, I want to continue with a general assessment of two of the main market points in Japan at the moment. The Yen and the BOJ rate policy faced with an incoming slowdown and potential recession.

As for the general situation in Japan I am sure it has not escaped your attention that Japan now seems set to enter a recession. The only question will be the extent and more importantly the length of the slump. In Morgan Stanley's GEF (edition 8th of February) Takehiro Sato points towards industrial production trends as well as US GDP readings and tantamount to the forecast that Japan is heading more meager times ...

The risk of dual recession is mounting. Our US economics team is already calling for capex-induced negative GDP growth in successive quarters (Jan-Mar, Apr-Jun), for a technical minor recession in the first half of the year by definition. We are forecasting that Japan will cling on to a modicum of growth in the Oct-Dec 2007 quarter, boosted by external demand, but there is a possibility that, like the US, that quarter will mark the peak and the economy will retreat in Jan-Mar. Future data for industrial production will tell us if this is the case.

This note will not focus on figures for industrial production or US GDP stats but rather I will initially move in with my traditional focus on the internal demand dynamics in Japan. As ever, the Japan Economy Watch contains the latest cyclical indicators fresh in off the wire in order to bring you up to speed. Here at Alpha.Sources I made a note recently which also sums up the most recent trends and pieces of data. For now, let us turn to the updated charts which usually form the main edifice of my analysis of Japan ...

If we begin with prices we see that inflation, at a first glance, seems to have returned to the shores of Japan even to such an extent that I will soon need to adjust the y-axis of my graph (and yes, this is an apology for a sloppy excel graph). Yet, the most important point to take away from this is, as I have been at pains to hammer home before, the disconnect between the inflation indices. Core inflation as measured by inflation ex food and energy prices is still in negative territory whereas the general index is shooting up thanks to headline inflation. This disconnect suggests that the inflation we are seeing in Japan is not driven by demand factors (demand pull) but rather by supply factors (cost push) and thus this does not signal an impending Japanese recovery. Quite the contrary in fact as the spurt of inflation at this particular point in time will only further pinch an already troubled Japanese consumer. Edward also moves in with a much worth while analysis of the inflation issues in Japan. A key point here will be the extent to which future inflation readings will have a bearing on the BOJ's decision to actually move in with a cut in the already low interest rate of 0.5% in order to accommodate a slumping economy. I don't think Fukui will cut rates before his term ends this spring and given the debacle which may arise in the context of finding a new governor it seems that economic fundamentals should not be the only thing to watch in order to make a call. What seems obvious however is that if inflation pressures suddenly show signs on abating the door will be open for a cut.

If we turn to the indicators for domestic demand proxied by various measures of consumption expenditures we can also close the book on my forecasts for 2007. As such, I dared to venture that growth in consumption expenditures would not increase by more than 1% on a y-o-y basis. Let us look at what we have.

Let us start by the forecast first. As can be observed the Japanese consumers put in a strong showing in December on a y-o-y basis with a 2.2% increase. I have to say that this figure represents something of a fluke for me since if you look at the underlying indicators such as income, retail sales and department store sales they all clocked in with declines. Ken Worsley also ponders the 2.2% increase and provides a detailed break-down which shows how spending on culture and recreation as well as furniture and household utensils accounted for a substantial part of the increase. I have to agree with Worsley though when it comes to January and beyond where the rise in energy prices, declining income, and a general slumping confidence will be sure to slow spending considerably. As for the forecast, the December reading almost had my forecast shattered or, if you will, assured that I was very close to the mark. Consequently, the mean value of the increase in consumption expenditures was a 0.95% monthly y-o-y growth rate. The two remaining charts are merely there for differentiation. The average value for the m-o-m chart was 0.217% in 2007 and together with the y-o-y figure it shows the momentum and level of growth rates we can expect from Japanese internal demand in a given economic environment. The long term index anchors my analysis in the sense that it supports the general hypothesis that domestic demand is on a structural decline in Japan and that this might very well be due to the demographic profile of Japan, this last point of course being a hypothesis of mine. In terms of forecasts for 2008 I have no trouble extending my forecast of an increase of <1% in domestic demand proxied by consumption expenditures (i.e. a strict consumption definition of internal demand dynamics). This may even seem too easy as 2008 is set to become a somewhat tough year for Japan economically speaking. This was thus it for Japan in 2007 and as is readily clear 2008 promises to bring with it a rather choppy ride for Japan. I will of course continue with my analysis as we move forward. Before I finish I want to make a leap up towards current events and assess a couple of mounting issues in the context of Japan.

Firstly, I think that the Yen demands some attention. Recently, I noted how the Yen was driven by anything but macroeconomic fundamentals. This clearly still seems to be the case. However, the main question is when this will end? At the moment and if you look at the FX price action in the beginning of 2008 almost all Yen crosses have been correlated with the stock market and thus by derivative the general sentiment of risk aversion in the market. This is nothing new in the sense that since the subprime market hit the global economy in the middle of August 2007 the Yen has been the main canary in the coalmine when it comes to the risk sentiment in the market. Yet, the Yen is not only driven by cyclical factors. As such, the decline in home bias of Japanese investors as well as the general yield disadvantage of Japan suggests that all those talks about an undervalued Yen aren't clued in to what is really going on in the sense that what is really the fair Yen value at this point? We need to think about the fact that the whole global economy seems to be undergoing the initial phases of a much more structural correction (recoupling) and in this context it is difficult to see how the Yen can stand its ground. It might not happen today or tomorrow but I have difficulties seeing how the risk aversion dynamic can hold the ground for the more wider and structural trend. Turning to more immediate drivers of the Yen the potential that Japan would intervene in currency markets to cushion the Yen's depreciation has reared its head with regular intervals. Back in early November I asked the question putting the limit at 105 for the USD/YEN which. Various other estimates have been around. Morgan Stanley's Stephen Jen puts it at 100 which is just the same as Macro Man. Recently, currency strategist at Dailyfx Boris Schlossberg kept the speculations alive suggesting, as me, that 105 just might be the threshold for Japan. Currently the Yen is hovering in the region of 106-107 and in this light Boris' conclusion seems to be a sound one, if a bit noncommittal, to take with you in the trenches of FX trading.

While there is certainly no guarantee that the BOJ will intervene at the 105-100 area, economic factors and positioning data suggest that Governor Fukui and company may indeed opt for that solution. Given that possibility the above mentioned strategies should hopefully minimize risk and optimize return for both momentum and carry traders. At the very least traders should pay particular attention to the price action if USDJPY slides down to the 105 level in the near future.

From a macroeconomic point of view this makes sense. Japan is largely dependant on exports to fuel growth as well as need to remember that an appreciating currency is deflationary and Japan has not escaped those fangs just yet. As for the Yen all evidence seems to point towards a continuation of current trends for the immediate future with the Yen acting as a global parameter of risk and investors' risk aversion. In this light, the risk of intervention needs to be weighed in as a potential market mover as we move forward.

The second topic I want to cover has already been mentioned above and essentially also cuts across the whole discussion on the Yen. In short, what will we see from the BOJ? Perhaps the most important thing to note here is that before we get to the discussion of what exactly the policy rate will be as we move forward into 2008 the BOJ will need a new governor. As I noted in my long end-of-2007 note this may well turn out to be quite a messy affair. Whether the shift of guards at the BOJ will turn into the political gridlock many observers have indicated is difficult to see from my desk here in Europe. However, there are some clear risks. As I have argued before a situation of political stalemate in which the Democratic Party of Japan (DPJ) will use their majority in the upper house to stall the nomination of a new governor will, all things equal, bring the MOF closer to monetary policy making. Basic logic would, in such a situation, call for a freeze of the nominal interest rate until the new BOJ leadership is set to assume their seats. However, if this current slowdown turns for the worse it may provoke measures which at this point in time might seem unrealistic. One risk is thus that Japan re-enters ZIRP over the course of 2008 and that this happens sooner rather than later. Before this materializes however, I am quite happy moving in behind the Morgan Stanley team in forecasting a cut in the main refi rate for Q2 2008.

In Conclusion

A lot of ground has already been covered in this piece and as such I think it is time to move in with some summarising remarks. I had two main objectives in this note. Firstly, I finalised my monthly analysis of consumption expenditures (domestic demand) and prices for 2007. Even though 2007 most likely will go down as a rather strong year in relative terms the failure of the overall consumption expenditure gauge to break the 1% threshold YoY tentatively suggests that domestic demand cannot become a driver of growth in Japan in any given sense. This point was underpinned by the monthly and long terms indicators of consumption. In connection to prices, we observed how inflation seems to be coming back to Japan. Yet, if we strip out energy and food Japan is still stuck in deflation and even though the core-of-core index might also nudge up towards positive territory the transmission mechanism from headline inflation to core inflation does not suggest that the inflation pressures we are seeing are driven by buoyant domestic demand. This does not warrant complacency against inflation but tells a story which needs to be told I feel if you really want to understand what is going on in Japan.

I also had a brief look at the Yen and more specifically the driver of the currency. I concluded that while risk sentiment seems to be the main trend explaining the current movements more general structural forces should not be neglected. The key issue here is timing and thus the dynamic relationship between the immediate environment and the more long term structural trends. Moreover, I also reviewed the latest speculation that we will observe intervention in the FX market by MOF and the BOJ. At this point, we have no clear indication that this will occur but I think the possbility should be entertained that the MOF will dip its toe at some point. In terms of the the BOJ and a subsequent call on the rate policy in Japan I moved in behind Morgan Stanley noting that Q2 2008 will see a cut to 0.25%. Another factor which I discussed was the extent to which the departure of governor Fukui will result in a policy gridlock. The risk is definitely there I would argue and it is a possibility which should be taken into account. I think that such a gridlock would (and should) result in a an effective standstill of rate movements but if the slump turns for the worse new dynamics may come into play where the MOF moves in to 'politically' steer down interest rates. Whether 2008 will see ZIRP is still an open question I think. I believe the probability is fairly high not least because I think that the recession we are now seeing on the horizon may very well be more severe than many expect. The main question however is not centered on the slowdown in Japan per se. This is the nature of economic cycles in the sense that they go up and down; yet, what remains the most compelling question in Japan's case is just how far and how long it will be this time.

Japan Consumer Confidence January 2008

Since Claus has just written a substantial analysis, this is just a brief note to keep the data up to date. The news, hardly unexpectedly, isn't good, since Japan's consumer confidence dropped in January to its lowest level in more than four years as rising prices and falling wages continued to squeeze households. The Consumer Confidence Index fell to 37.5 last month from 38 in December, according to the Cabinet Office in Tokyo today. Confidence among consumers hasn't been this low since June 2003.



Inflation expectations have certainly arrived although, if we look at what Claus has to say about core-core prices, they may yet turn out to be disappointed as the year advances, and a record 84.9 percent of those questioned said they thought prices would be higher in a year.

The Cabinet Office left its assessment of sentiment unchanged for a second month, describing it as ``deteriorating.''

In terms of the sub-indexes, both the employment component and the willingness to buy one continued to deteriorate, with employment falling to 38.6 from 40.6 in December and willingness to buy falling to 36.7 from 37. As can be seen in the chart below these have both been on a downward trend for some months now.