October 30, 2004

Japan's Long Run of Deflation Is Expected to End Next Year

TOKYO, Oct. 29 - Japan's central bank said on Friday that consumer prices would turn higher in 2005, if only by a sliver, heralding a possible end to the deflation that has plagued the nation for more than five years.

The Bank of Japan's policy board forecast that the core consumer price index, which excludes prices of fresh food, would rise 0.1 percent for the fiscal year ending in March 2006. Even such a tiny increase would be welcome in a nation where consumer prices have been flat or have fallen in every month but one since May 1998.

The central bank governor, Toshihiko Fukui, was quick to stress that the forecast was in no way a sign that the Bank of Japan was considering any tightening in its ultra-easy monetary policy anytime soon. Mr. Fukui reiterated the position that the bank would need convincing evidence of a lasting rise in prices before it ended its zero-interest-rate policy.

Short-term interest rates in Japan have been set at virtually zero since March 2001 in an attempt to reverse the price declines and foster economic growth. And the central bank remains "firmly committed" to the policy for now, Mr. Fukui said Friday.

Most economists agree that the end of the central bank's zero-rate policy is probably more than a year away. Still, the official forecast of an upturn in prices, however tiny, offered a confirmation of sorts that Japan was nearing the end of one of its most nagging economic problems.

"We are now in the final stages of deflation," said Mamoru Yamazaki, chief economist at Barclays Capital. "Moderate inflation next year would be a very good thing for the economy."

To be sure, there have been few signs so far that prices are turning higher. Consumer prices in the Tokyo area fell 0.3 percent in October compared with a year earlier, figures released Friday showed. Nationwide consumer prices were flat in September from a year earlier.

The long bout of deflation has served to lower once sky-high prices of food, clothing and other goods to levels closer to those in other developed countries. But the steady decline has also taken a toll on corporate profits.

Deflation is also a drag on economic growth as it encourages consumers to put off big purchases on the expectation of lower prices to come. Furthermore, the price declines are seen as a contributing factor in a long slump in incomes, which, in turn, is prompting many Japanese to tighten spending. Spending by Japanese households fell 1 percent in September from August, figures released Friday showed.

Although Japanese consumers have been restrained, many companies are pulling in record profits thanks to booming exports of Japanese cars and electronic equipment. Earlier this week, Sony, Matsushita Electric Industrial and Canon all reported solid profit growth for the most recent quarter, thanks to rising sales of flat-panel TV's, digital cameras and other electronic equipment.

Central bank forecasters expect that over the next year this corporate prosperity will translate into better job prospects for Japanese workers, higher wages and more spending. If people start buying more, an increase in prices is sure to follow, they reason.

There are some signs that Japan's job market may be improving, if slowly. Unemployment fell to 4.6 percent in September from 4.8 percent in August, figures released Friday showed. Much of the improvement, however, came from a drop in the number of job hunters; the economy actually lost 70,000 jobs during the month.