To Raise or not to Raise ...

This still seems to be the most vexing question concerning the Japanese economy at the moment. In terms of economic data going out of 2006 the news flow has been anything but positive thus raising serious question about the BOJ's strategy of returning to normal or at least moving further away from its quantitative easing policy operationalized as ZIRP which was formally ended in June 2006 as the BOJ raised to 0.25%. As I said the data from Q3 and (most likely) Q4 is not positive (Bloomberg).

Japan's broadest index of future economic activity dropped in November, indicating that growth in the world's second-largest economy may slow.

The leading index, which comprises measures such as machinery orders and consumer confidence, fell to 20 percent from 54.5 percent in October, the Cabinet Office said today in Tokyo. The result matched the median estimate of 26 economists surveyed by Bloomberg News. A number below 50 indicates the economy will cool in three to six months.

Japan's economy grew at the slowest pace in almost two years in the third quarter of last year after the biggest slump in spending by consumers in about a decade offset an expansion in business investment. Some economists expect the nation's corporate growth to eventually flow through to consumers.

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Bank of Japan Governor Toshihiko Fukui cited weak consumer spending as a reason for keeping the lowest interest rates among industrial nations unchanged in December and the central bank downgraded its assessment of household spending in its monthly report. The bank ends a two-day meeting to decide the level of interest rates on Jan. 18.

Still, we the recent hints from BOJ governor Fukui are not decisive in term of predicting a policy at the meeting next week. However, the Bloomberg piece cited below still seems to narrate the situation as a likely raise next week on the expectations of rising inflation and hmm consumer spending on an 'expansiory' path. Don't bet it all here I would say.

Bank of Japan Governor Toshihiko Fukui reiterated that policy makers will examine economic data and act accordingly, offering few clues about whether they'll raise interest rates next week.

``We are committed to supporting sustainable economic growth by closely examining data and implementing policy appropriately,'' Fukui said at a quarterly meeting of the Bank of Japan's regional branch managers in Tokyo today.

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``The governor intentionally refrained from dropping any signals about next week's rate decision to avoid shaking up financial markets,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. ``Markets are pretty much factoring in a rate hike, and we bet the central bank will take action next week.'

(...)

The central bank kept its key rate near zero for six years to bring Japan out of deflation before raising it in July to 0.25 percent.

Consumer spending is on an ``expansionary path'' although its pace of growth has been modest, Fukui said. ``It is highly likely that the expansion of the Japanese economy will be sustained.'' He said core consumer prices, which exclude fresh food and are the bank's key gauge of inflation, will keep rising.

 It will ve very interesting to see what the BOJ has in store for us come next week.