Bank of Japan May Forecast Third Year of Deflation This Week

Oct. 26 (Bloomberg) -- The Bank of Japan will probably forecast this week that deflation will extend into 2011, an indication that borrowing costs are likely to stay near zero.

Consumer prices excluding fresh food, the bank’s preferred gauge of inflation, will tumble 0.5 percent in the year ending March 2011, and economic growth will accelerate to 1.2 percent, according to the median estimate of 15 economists surveyed by Bloomberg. The central bank will release its semiannual outlook on Oct. 30 at 3 p.m. in Tokyo.

Policy makers will say in the report they plan to keep the benchmark interest rate low to foster the nation’s recovery from its worst postwar recession, analysts predict. That commitment, against the backdrop of forecasts for entrenched deflation and a fragile recovery, will quell any investor speculation that the bank unwinding emergency credit measures will lead to a rate increase, said Masaaki Kanno.

“The BOJ will probably highlight that consumer prices will be stuck in negative territory and use that to convince investors that a rate hike is still far, far away,” said Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo.

Eleven analysts said the bank will say this week it plans to stop buying commercial paper and corporate bonds from lenders in December as scheduled because companies are finding it easier to obtain credit.

Fifteen of the 16 economists who gave monetary policy forecasts through 2011 said they expect the key rate to stay at 0.1 percent through the end of 2010 at the earliest. Japan’s borrowing costs have been kept below 1 percent since Sept. 1995.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aY.5KT4ssN9s

So, any other JGB buyers out there ?

 

no, but I will watch yen fx crosses very closely. If equity markets see more downside I am actually looking for an inflation surprise in Japan to the upside (which I dont think will happen but lets see). If then I think yen crosses will make for a great trade over the next couple weeks. But having traded out of Japan the most probable result is gonna be no surprise to the upside nor downside...

 

Japan cannot possibly afford inflation, so there will be deflation, by definition.

However, I wouldn't go crazy buying JGBs. There's going to be a rude awakening at some point. It's been twenty years in the making. In the past week, especially, there's been a lot of flow expressing the 'death spiral' sort of view. That makes sense, given that Japan is furthest along that path than any other Western economy.

 

is this the general approach at ET to logic and how markets work? "xxx cannot afford inflation, so there wont be any..."

hmm makes me wonder

 

15 out of 16? It maybe time to "fade" all of them.

 

pst, I think most of them are American

 

I don't know anything about any general ET logic... Moreover, I don't see anything with my reasoning. It is a fact that, if rates were to go up, Japan would be unable to deal with the ballooning costs of servicing its debt. Given the politics, CPI will not go up, so that the BoJ doesn't get an excuse to raise rates.

I speak from bitter experience, as I was long JGBI breakevens during the CPI rebase of 2006.