Chart I
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- The Producer Price Index ( PPI ) leads the Consumer Price Index ( CPI) by 2 -5 months.
- Normally the CPI and PPI tend to grow / recess together.
- But as it can be seen the PPI has grown much faster than PPI since May 2003.
The question is - whether the CPI will grow up further towards the PPI area. ( or vice versa)
Chart II
Chart III
Chart II and III indicate that - if only PPI and CPI were to be taken into consideration - the Bank of Japan ( BOJ) would be ratcheting up its interest rates - continuously.
However - it is not inflation that seems to be the issue that will be guiding us on the possibility of Interest rate hikes by the BOJ.
The real issues seem to be the slow growth in GDP and Consumption.
Back ground
In 2000 Japan was running at a GDP growth rate of 3% ( up from - 2.6 % in 1998 ). The interest rates from 1998 were at 0%.
In 2001 BOJ had raised its interest rates from 0% to 0.25%.
The GDP dropped back to -1.9% in 2002 - and the BOJ again reduced its rates from 0.25% to 0%.
Next
Towards the end of 2005 early 2006 - the GDP growth rate was at the 2.6% - 3 % area.
In Mid 2006 the BOJ raised its interest rates again from 0% to 0.25%.
The GDP gowth rate has dropped back to 1.6%.
Japan will be cautious not to repeat the same situation - that it faced in 2001. Any drop in growth rate - will indicate that interest rates will not be hiked.