BoJ forecast lifts hope on deflation

Japan?s central bank has issued a definitive forecast that the country, dogged by falling prices since the mid-1990s, will experience no deflation in the next fiscal year.

However the Bank of Japan?s prediction of marginal inflation in the 12 months to March 2006 did not point to a clear upswing in price trends or exclude the possibility of a relapse into deflation, economists said.

The central bank?s nine-member policy board on Friday issued a median forecast that consumer prices would rise 0.1 per cent in fiscal 2005. The forecasts of individual policy board members, contained in a half-yearly report, ranged from minus-0.1 per cent to plus-0.3 per cent.

Deflation became a symbol of Japan?s economic malaise as it eroded corporate revenues and increased the real value of borrowers? debt burdens. That in turn undermined already weak business and consumer confidence.

A sustainable return to rising prices would be a significant watershed in a recovery that could, some commentators say, mark Japan?s escape from the legacy of the 1980s bubble.

Ahead of the central bank?s inflation forecast, Toshihiko Fukui, BoJ governor, had emphasised the central bank would not rush to tighten its ultra-loose zero interest rate policy even when consumer prices turned positive.

In a report released with the new forecasts the BoJ said: ?It is not certain whether or not the occasion will arise during fiscal 2005 to change the present monetary framework.?

It continued: ?If higher productivity and other factors continue to contain to a large extent upward pressure on prices as the economy follows a sustainable and balanced growth path, this will likely give the bank latitude in conducting monetary policy.?

The BoJ has pledged not to tighten policy until three conditions are met: the CPI must be positive for several months; most board members must expect prices to remain positive for the foreseeable future; and they must be confident the economy is strong enough to withstand the move.

Separately on Friday, Japan?s consumer price index for September showed prices were flat during the month for the first time since February.

The result exceeded market forecasts of a 0.1 per cent decline, but Ryo Hino, economist at JP Morgan, said in a research note that the flat reading was not the triumph it appeared to be for two reasons.

First, rising oil prices have created a surge in petrol prices that distorted the overall CPI. Second, the index for Tokyo in October - released along the nationwide index for September - showed prices fell 0.3 per cent from a year ago in the capital.

The BoJ?s latest median growth forecast was for economic expansion of 3.6 per cent in the current fiscal year and 2.5 per cent in the following 12 months.

?Looking forward, Japan?s economy is expected to continue recovering and gradually move to a sustainable growth path,? the report said.

Exports would continue rising but at a slower pace; industrial production, profits and capital investment would also trend higher; and household income would ?start increasing gradually?, boosting personal consumption.