November 14th 2005
Japanese quarrel over monetary policy
It is expected this quarter will marl the fourth consecutive of increasing economic growth in Japan. Accordingly, economists no longer believe deflation represents a threat; in fact, most economists are predicting core price inflation will exceed .5% this year. Japanese central bankers have responded to the prospect of rising inflation by suggesting an increase in short term interest rates, which are currently 0%. In Japan, however, the political establishment has just as much control in setting monetary policy as the Central Bank. In this case, Japanese politicians would like to make sure the Japanese economy is on solid footing before interest rates are hiked. Currency traders have not responded favorably to a prolonged period of easy money, as evidenced by the Yen’s continued decline. The Financial Times reports:
[One economist] believes year-on-year Japanese inflation is about to turn positive, as sharp falls in the price of mobile phones, electrical items and rice a year ago drop off the index. However, with the sustainability of this trend in doubt, he sees rates remaining at, or very close to, zero until April 2007 at the earliest.
Read More: Yen falls on battle over monetary policy