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Policy change more likely on new Japanese data


by Elaine Frei
March 3, 2006

The core consumer price index in Japan gained 0.5 percent in January, just a bit more than had been expected. It was the third month in a row that the core CPI, which excludes fresh food, increased, and represented the reading’s highest level in eight years. The advance led some analysts to expect that the Bank of Japan will abandon its loose monetary policy as soon as its next board meeting next Wednesday. Others still feel that the Bank will wait until April to begin making changes.

There are indications that the Japanese government is coming to terms with the idea that monetary policy will change, and change soon. However, as late as Friday both the finance minister and the interior minister made comments asserting that the economy is still in mild deflation. Prime Minister Junichiro Koizumi, however, said that there are signs that the Japanese economy is exiting deflation.

The new CPI data joins other strong economic data in seeming to confirm the Bank’s opinion that the time to tighten monetary policy has come. Fourth-quarter economic growth was at an annualized rate of 5.5 percent, and while unemployment grew by 0.1 percent to 4.5 percent in January, the proportion of jobs to job-hunters was very nearly even.



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