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Last Updated: Monday, 31 October 2005, 11:37 GMT
Japan sees deflation years ending
Bank of Japan Governor Toshihiko Fukui
Policymakers are pointing to more stable times for Japan's economy
Japan's central bank has predicted that a seven-year period of deflation is due to end - along with its long policy of keeping interest rates at zero.

The Bank of Japan said prices would probably grow again in the fiscal year to 31 March 2006, before picking up further over the subsequent 12 months.

As a result the bank may finally raise rates, after four years of keeping the official cost of borrowing at zero.

In an effort to reassure investors, it said there was no rush to make changes.

Better times

Japan's economy has been recovering, but price growth has taken longer to rebound.

With prices falling, companies are less likely to expand and hire new workers, while consumers get fewer wage increases, spend less and find it harder to pay back debts. A pick up in price growth is a key marker on a lasting road to recovery, analysts said.
Man pulling trolley stacked with yen banknotes
Japan's economy has been held back by deflationary pressures

According to the Bank of Japan, consumer price growth for the current fiscal year ending March 2006 will be between 0% and 0.1%.

In the following 12-month period, that will increase to between 0.4% and 0.6%, the bank said.

'Abrupt change'

Following its board meeting, the bank also laid out its economic growth forecasts for the next two years.

It estimates that gross domestic product (GDP) will be between 2.2% and 2.5% in the current fiscal year, and 1.6% to 2.2% for fiscal 2006.

With the economy motoring more smoothly, and prices set to grow, speculation has been growing that the bank may look to shift its interest rate policy.

"The possibility of a departure from the present monetary policy framework is likely to increase over the course of fiscal 2006," the bank said.

But it also said it was not in any hurry to change its monetary policy.

"A change of the policy framework itself does not imply an abrupt change in terms of effects of policy," the bank said.


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