Japan’s bank loans grew strongly in December, bringing lending for the whole of 2006 up 1.2 per cent over the previous year, the first improvement in a decade.
Although the December increase of 2.8 per cent was flattered by a one-off factor, it was accompanied by a robust growth in money supply, a sign that the financial system could be easing back to normality after years of deflation and zero interest rates.
That, together with continuing weakness of the yen – which on Friday broke through Y120 to the dollar to hit a 20-year adjusted low – may give the Bank of Japan the courage to raise rates when it meets next week, market participants said.
The bank has been under pressure from politicians not to raise rates, even though rate differentials with the US and Europe remain wide.
In an interview with FT this week, Hiroko Ota, economy minister, said: “We are now in a critical stage in terms of whether we can escape from deflation or not. And the BoJ is aware of that situation.”
Unlike the government, which says deflation has not yet been beaten, the BoJ effectively declared that the era of falling prices had ended when it raised rates to 0.25 per cent in July.
Ms Ota, asked if she would be surprised if the BoJ raised rates next week, replied: “I want them to be accountable in their policy management.”
Kiichi Murashima, economist at Nikko Citigroup, said the BoJ was prone to ignore disappointing consumer-spending data and a subdued consumer price index and look instead at what it saw as a virtuous cycle in the economy. The bank has spoken of higher profits eventually feeding through to higher wages and higher consumer spending.
Mr Murashima said he expected the bank to raise rates by 0.25 points to 0.5 per cent at a two-day meeting beginning next Wednesday. He said the bank was likely to raise rates two more notches in 2007.
Toshihiko Fukui, BoJ governor, said Friday he expected “long-term economic growth, with a positive cycle of production, income and spending.” He said that, in spite of declining oil prices – which, unusually, are included in the core CPI – he expected consumer prices to “keep registering gains as Japan’s economy is seeing an excess of demand over supply.”
Growth in bank lending peaked in July at 2.9 per cent before falling back for the rest of the year. Many companies are funding their investments through cash flow, which has increased sharply in recent years. In November and December, bank lending edged up again, potentially ending fears that credit expansion had stalled.
However, Credit Suisse said the rise in December was down to one M&A transaction and might prove only temporary. Growth in bank lending remained fairly modest, it said.