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Tuesday, May 17, 2005

Japan: No End To Deflation in Sight

The former deputy governor of the Bank of Japan Yutaka Yamaguchi is suggesting that the BoJ is is poised to abandon its forecast of a return to inflation this fiscal year, delaying an exit from zero interest rates until the year to March 2007 at the earliest. What a surprise!

Perhaps also worthy of note is the fact that despite a moderately successful quarter (1.3% growth in real terms, or an annualised rate of 5.3%) stocks continue to slide. In part stocks are likely to be influenced by any indication of slow-down in the US or China, given the export dependent character of the Japanese economy.

But there is more here. The first quarter growth followed zero growth in the fourth quarter of last year (so you could say that over the half year growth was at a 2.65% rate: still not too bad mind you). Worse, deflation is deteriorating: the GDP deflator, which measures the degree of deflation, was put at minus 1.2 pct for Q1, compared to minus 0.4 pct in the final quarter of 2004.

And furthermore............despite the higher than expected GDP growth, the total amount paid in wages - seen as a key driver of long-term recovery- remained flat quarter on quarter. This is hardly surprising since, for demographic reasons, the Japanese labour force is actually shrinking, and at such a pace that it is hard to see how real income growth can ever compensate for the reduced head count.

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