Is the BOJ trigger happy?

Meanwhile, while 2006 ushered in the end of the zero interest-rate policy, some analysts wonder if the nails are actually in the deflation coffin. The BOJ surprised the marketplace with a 25 basis-point rate hike at the Feb. 21 meeting, which brought the overnight rate to 0.50 percent. At the subsequent March 19 meeting, the BOJ held steady. But, what has the data revealed about inflation in recent months?

The January 2007 consumer price index data came in at zero-percent growth year-over-year, down from 0.3 percent in December, Buskas says.

“There is still a lot of uncertainty and speculation about the future of price pressures in Japan,” she says. “The BOJ appeared to be trigger happy, given the still very soft and nascent signs of price pressures.”

Sean Callow, senior currency strategist at Westpac Institutional Bank, also shed light on some concerns on the inflation front.

“The bank argues that the Japanese economy is still recovering, with rising output, incomes, and spending,” he says. “They claim that the fourth-quarter 2006 consumption spending weakness was likely to be temporary. They also played down the very low CPI readings, saying the fall in oil prices in late 2006 was lowering inflation only temporarily and that deflation was likely behind them. However, much of this is debatable and accounts for the surprise to many in the markets.”

His firm projects Japanese CPI to rise a modest 0.3 percent annually in 2007 vs. 0.2 percent in 2006 and -0.3 percent in 2005.

Pointing to the recent BOJ hike, Moody’s Economy.com’s Buskas says in even stronger terms, “I think the February rate hike was a misstep. There wasn’t sufficient evidence of price pressures to hike in February.”

So what’s the risk here for the BOJ?

“They are shooting themselves in the foot if they hike too fast,” Buskas says. “It could push Japan back to where they came from: deflation.”

Analysts see potential for the BOJ to remain on hold throughout the remainder of 2007, or a modest chance of one more 25 basis-point hike later in the year.