September 08, 2008

Recession reports - Japan inflation hits decade high levels

It is reported that Japanese annual inflation hit a decade high of 1.2% in March 2008, helping trigger one of the biggest ever sell offs in yen bonds as investors realized Japan has no immunity from price pressures facing the rest of the world and that could eventually lead to a rate increase despite a weak economy.

Like other central banks, the Bank of Japan faces rising fuel, raw materials and food prices as it ponders what to do with interest rates, already at a very low 0.5% in Japan. But because the increases in consumer prices in major economies are largely due to climbing costs, rather than strengthening demand, investors have until recently been eyeing more rate cuts, rather than increases.

The Japanese core inflation rate of 1.2% which was released on last week was just as economists had forecast, but it reinforced the pressure on the Bank of Japan to keep inflation under control, and shifted investors' focus toward an eventual rate increase.

The yield on two year Japanese government bonds, the most sensitive to interest rate expectations, jumped to a six month peak, with investors affected as much by rate expectations in the United States and other major economies as the outlook for Japan.

Mr Yasuhiro Onakado chief economist at Daiwa SB Investments said that "The market is now moving on the view that the worst is behind us in the subprime related woes, which is spurring a sharp reversal in positions that had bet on a bearish outlook on the economy and financial markets.”But he warned the market might go too far.

He added that "As the markets settle from the sharp unwinding of positions tilted excessively toward such a bearish view, players will come to realize that time is needed to resolve the credit market problems and see the US economy recover and see bonds as being oversold."

Mr Hiroko Ota economics minister told a news conference after a cabinet meeting that "The price rises are being led by upward pressure from higher raw material costs and not by strong demand, so it is not a good pattern.”