Japan in lasting economic recovery, BOJ’s Muto says

Financial Express ^ | September 3, 2005

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Japan’s economy, the world’s second-biggest, is in a ‘lasting and self-sustaining’ recovery, Bank of Japan Deputy Governor Toshiro Muto said, indicating that deflation of more than seven years may be close to an end. ‘‘The possibility is gradually increasing that we will see a stable increase in core consumer prices over the next fiscal year that starts April 1,’’ Muto said in an interview in Tokyo. He didn’t rule out the possibility that sustained price gains may start as early as the end of this fiscal year.

The bank has pumped cash into the economy and held borrowing costs at almost zero as it struggles to overcome deflation, which has eroded corporate profits, discouraged consumers from spending and limited Japan’s growth to an average of 1.3 percent in the past five years.

Sustained gains in consumer prices and a lasting recovery would meet conditions needed for the bank to shift policy, and start interest-rate targeting as the economy expands.

‘‘If deflation were to end that would be a sign Japan’s economy is gaining momentum, and it’s becoming more of a player in the global economy as another source of growth for exports,’’ said Paresh Upadhyaya, a currency portfolio manager in a group that overseas $29 billion at Putnam Investments in Boston. ‘‘It’s another sign the economy is recovering from the structural difficulties since the pop of the bubble.’’

Japan’s bubble economy burst in the early 1990s, dragging down equity and real estate prices by as much as 75 percent. Core consumer prices, which exclude fresh food, fell 0.2 percent in July. They’ve risen in only one month since April 1998.

Yen advances

The yen rose to 109.33 per dollar as of 5:54 p.m. in Tokyo, from 109.82 late yesterday in New York. The currency is headed for a fourth weekly gain in five against the dollar, partly on speculation the U.S. Federal Reserve will pause in its campaign of interest-rate increases. The yen was also boosted as polls showed rising approval ratings for Prime Minister Junichiro Koizumi before Sept. 11 elections.

Japan’s economy expanded at an annual 1.1 percent pace in the second quarter, the third straight expansion, led by increases in consumer and capital spending. The economy grew at an average annual rate of 3.3 percent in the first half of the year, more than double the 1.3 percent average over the past five years, according to Bloomberg calculations.

Three conditions

The central bank has said it won’t change its so-called ‘‘quantitative-easing’’ until these conditions are met: core prices stop falling for at least a few months, policy makers are sure they won’t resume sliding and the bank is confident about the economy’s strength.

The bank started this policy in March 2001. Muto doesn’t ‘‘rule out the possibility’’ that consumer prices will achieve sustained gains by the end of this fiscal year, when asked about this year’s outlook for prices.

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