Japan's consumer prices fall, other indicators point to possible rate hike

Japan's consumer prices continued to fall in May. Bloomberg reports:

Japan's consumer prices fell 0.1 percent in May, a pace of decline unlikely to dissuade the central bank from raising its benchmark interest rate, the lowest among major economies.

Prices are not likely to start rising soon.

Tokyo's core prices unexpectedly fell 0.1 percent in June, the first drop in three months. Prices for the capital are released a month ahead of the nationwide number and seen as an indicator of the direction of Japan's prices. Economists expected a 0.1 percent gain.

But the Bank of Japan is likely to gradually tighten monetary policy anyway as the economy remains robust.

The jobless rate held at a nine-year low of 3.8 percent in May...

Household spending rose 0.4 percent from a year earlier, the bureau said, extending the longest winning streak in three years. The job-to-applicant ratio, which shows how many positions are on offer to a job seeker, rose to 1.06 in May from 1.05 a month earlier, the Labor Ministry said.

Japanese government officials appear confident about the economy.

"My view on the end of deflation hasn't changed," said Economic and Fiscal Policy Minister Hiroko Ota. Ota has said the end of deflation is in sight. The tighter labor market will fuel wage growth and eventually contribute to price gains, she said.

Finance Minister Koji Omi said today's numbers "confirmed the government's view that the overall economy continues to recover in a solid manner."

And most importantly, so is Bank of Japan Governor Toshihiko Fukui.

Fukui has said consumer prices will resume rising, given that the economy will probably exceed its potential growth rate. The bank estimates Japan's potential growth, the pace achieved by utilizing most of the country's capacity and workforce, is 1.5 percent to 2 percent, and predicts a 2.1 percent expansion in the current fiscal year and the 12 months ending March 2009.

So when are interest rates expected to be raised?

Fourteen of 31 economists surveyed from June 4 to 8 expect the bank to raise rates in August, up from eight last month, the Economic Planning Association, a government-affiliated think tank, said this week.