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Friday, November 25, 2005

Good News, Now Let Battle Commence!

Most commentators are getting excited about the recent reading on the Japanese core consumer prices index which stopped falling in October. There is just one small snag, the core CPI in Japan - until next August - still includes oil and energy costs. Stripped of these it is estimated that the underlying CPI was still down by about 0.3 per cent. The reading does however mark the first 'near miss' of the Japanese index with positive prices in some years, so it is hardly a 'non-event'. Meantime, as the FT notes:

Instead of celebrating, politicians lined up to remind the Bank of Japan that it was too early to declare deflation dead or to ditch its super-loose monetary policy.

Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.

The government of Junichiro Koizumi, prime minister, is worried that the BoJ could choke off the lengthy, but fragile, recovery by exiting too early from the ultra-loose quantitative easing monetary policy adopted in 2001.

Curiously enough all of this has a striking parrallel with what is happening in Germany right now, where politicians, who want to address the fiscal deficit by raising taxes are worried that the ECB could choke off the fragile German recovery by exiting too early from the ultra-loose monetary policy operating for some months now in the eurozone.