Standing Fast

Hardly any economist or analyst battered an eyelid when the BOJ chose yesterday to hold the main interest rate at 0.5%. Indeed much of the recent data coming out Japan (and here) recently point to considerable risk of Japan slipping into deflation in 2007 and on that note most economists (including yours truly) expect the BOJ to be in a holding mode for the time being especially as the US economy is to slow down further into 2007.

(from Bloomberg)

Japan's central bank kept interest rates unchanged as consumer prices threaten to drop, making it hard to justify a second consecutive increase.

Governor Toshihiko Fukui and his policy board voted unanimously to keep the key overnight lending rate at 0.5 percent, the lowest among major economies, the Bank of Japan said in a statement today in Tokyo. The bank doubled the rate last month.

``The Bank of Japan probably wants to monitor the effect of the February rate hike,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities Japan Ltd. in Tokyo.

Political pressure ahead of an election in July will also make it difficult for the bank to tighten credit until the last quarter of 2007, Yamazaki said. Business confidence in Japan probably fell from the highest in two years amid concern the U.S. economy may slow, the bank's Tankan survey may show next month.

The yen traded at 117.92 per dollar at 5:44 p.m. in Tokyo compared with 117.87 before the announcement. The yield on Japan's 10-year bond fell 1.5 basis points to 1.56 percent.

Today's decision was predicted by all 49 economists surveyed by Bloomberg News. Fukui said after last month's meeting that the board has no plans to raise rates consecutively.

The governor later told reporters that the U.S. economy remains likely to expand gradually, even after weak data raised concern that growth in Japan's largest export market may slow.


Reports may show Japan's core consumer prices dropped in February or March because of cheaper oil, Fukui said. Core prices, which exclude fresh food and are a key gauge of inflation in Japan, failed to rise in January after climbing 0.1 percent year- on-year in December.

Fukui said the drop in core prices wouldn't necessarily be bad because lower oil costs help economic growth. Core prices will stay on an expansionary path in the long term, he added.

Kazumasa Iwata, one of the bank's two deputy governors, said at the meeting that the policy makers should explain their outlook for consumer prices more clearly, according to Fukui. Iwata was the sole dissenter to last month's rate increase.

As always, Morgan Stanley's Japan watchers are also following the situation closely and the recent comment from Takehiro Sato as a preview of the Tankan business confindence survey which then failed to come through according to Mr. Sato's expectations of an increase relative to December. In fact, the survey showed that business confidence dropped albeit ever so slightly from the December figures.

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