Financial thoughts

Bank of Japan policy makers said they need to monitor consumers' inflation expectations as prices increase at the fastest pace in a decade, minutes today showed.

“Consumers' inflation expectations were rising, reflecting the ongoing rise in the price of daily necessities, and this warranted attention,'' some members said at the April 8-9 policy meeting, according to the minutes. The central bank has kept the key interest rate at 0.5 percent since February 2007.

Japanese consumers, used to stagnating prices and wages, are facing more expensive milk, bread and gasoline, and most households expect costs to keep rising. Bank of Japan Governor Masaaki Shirakawa said this week that he's watching how rising inflation expectations affect the way companies set prices.

“If you're a central bank you've got to be worried when you see such a pickup in inflation expectations,'' said Richard Jerram, chief Japan economist at Macquarie Group Ltd. in Tokyo. “In the short term, they want to be comfortable with the cyclical outlook, but once you get into next year you could see reasonably aggressive tightening.''

The yield on Japan's 10-year bond rose 7 basis points to 1.735 percent, a seven-month high, as investors cut their holdings of debt on concern inflation will accelerate. The yen was little changed at 104.05 per dollar as of 12:27 p.m. in Tokyo.

Easier to Raise

Some 86.2 percent of households predict prices will increase a year from now, the second-highest proportion on record, a government report showed last week. That may make it easier for companies to raise prices, fanning inflation, economists say.

“As inflation expectations rise, price hikes that have been impossible to implement in the past become easier to implement,'' Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong, said in a May 19 note.

Yamazaki Baking Co., Japan's largest bread and pastry maker, increased bread and pastry prices for the first time in 17 years in December. Meiji Dairies Corp. and Morinaga Milk Industry Co., the nation's biggest milk producers, raised prices for the first time in 30 years because of higher costs of grains and petroleum.

The seven board members agreed that the risk of higher inflation worldwide is increasing because of costlier commodities and crude oil, according to the minutes. They said the increase in raw-materials costs will cause Japan's economy to slow “for the time being'' before returning to a “moderate growth path.''

Pessimistic Consumers

Consumer prices rose 1.2 percent in March from a year earlier, the fastest pace since 1998 http://paydayloans-on.com. Gains probably eased in April, though prices will keep rising as a trend, one member said. A few members said rising prices have worsened consumer sentiment, which fell to a five-year low in April.

Shirakawa told parliament yesterday that costlier energy and raw materials will erode corporate profits and household incomes and that may force companies and consumers to pare spending. Crude oil exceeded $135 a barrel for the first time yesterday.

Since the April 8-9 meeting, the central bank cut its growth forecast, raised its prediction for inflation, and shelved a policy of gradually raising interest rates.

The members said “downside risks'' for the U.S. economy are rising and the outlook for global growth is “uncertain,'' according to the minutes. Financial markets around the world remain volatile, they said.

The International Monetary Fund said this week that the bank's policy shift represents a “wait-and-see attitude.'' That's the “appropriate stance'' to safeguard growth, said Daniel Citrin, IMF deputy director and mission chief for Japan.

Economists' Predictions

Only two of 31 economists surveyed by Bloomberg News predict the bank will increase borrowing costs this year, with the remaining 29 expecting no change. Japan's key rate remains the lowest in the industrialized world.

Board members shared the view that business investment is slowing and corporate profits are leveling off, the minutes said. One policy maker said Japanese companies may have to cut their profit forecasts for the year ending March 2009 because the yen was stronger against the dollar than executives predicted.

Companies said the dollar would average 109.21 yen this fiscal year in the central bank's March Tankan survey.

Shirakawa was appointed governor of the central bank on April 9, while the policy meeting was under way. He had been acting chief since March 20, after the term of his predecessor, Toshihiko Fukui, expired and the opposition blocked the government's first two choices for the role. Two positions on the nine-member policy board remain unfilled.

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