Not Much News from the East

By Claus Vistesen Copenhagen

As predicted, the Bank of Japan ended its two day policy meeting with a holding operation. In its statement which, it has to be said, is relative brief the BOJ emphasised that significant downside is present with respect to the future course of domestic activity in the form of fixed capital formation and consumption. It was also interesting to note that the BOJ moved in with an indication that inflation pressures might abate in the coming months.

Economic growth is slowing further reflecting weaker growth in business fixed investment and private consumption against the backdrop of high energy and materials prices. While growth will likely remain slow for the time being, it is expected to gradually return onto a moderate growth path thereafter. CPI inflation rate (excluding fresh food) is currently around 1.5 percent due to increased prices of petroleum products and food. CPI inflation is expected to gradually moderate after becoming somewhat elevated in coming months. These suggest that the possibility of the economy remaining on a sustainable growth path with price stability is relatively high.

As Bloomberg's Mayumi Otsuma also latches on to it is the situation of stagflation lite which is pulling economic activity down. This was a theme I also noted in my recent in-depth look at Japan's economy. In general the risks for a raise in 2009 seems slim and as I noted recently it would take a marked and sustained increase in both core and headline inflation for this to materialise. Otsuma quotes research at JPMorgan Chase and Co. pointing towards a 13% chance/risk that the BOJ will raise come December.

Ultimately it looks like a solidified path of holding interest rates steady in Japan. In either direction it would take a sudden and large swing in fundamentals before the BOJ shifts its stance.