Not Much News from the BOJ

Today's meeting in the BOJ did not bring much news from the eastern shores of Asia as the overnight rate was kept at 0.5%. Relative to the mixed signals from the economic readings on August there is not much new data available apart from Ken Worsley's note that one of the leading economic sentiment indices (Economy watchers) fell for a sixth consecutive month. As for the meeting itself the BOJ continued, like the ECB, to cite the ongoing turmoil in financial markets as a reason for maintaining the rate*.

The Bank of Japan kept interest rates unchanged today because it needs more time to gauge the effect of the U.S. subprime-mortgage crisis on the global economy, Governor Toshihiko Fukui said.

Policy makers kept the benchmark overnight lending rate at 0.5 percent, the central bank said in a statement today in Tokyo. The decision was by an 8-1 vote, with Atsushi Mizuno the sole advocate for an increase for a fourth consecutive meeting.

Fukui said the central bank had ``seen some improvement in global financial markets, yet some uncertainties remain.'' Waning confidence and investment at small businesses is also a risk to economic growth, board members Kazumasa Iwata and Miyako Suda said in the past month.


`The biggest uncertainty right now is how much U.S. housing prices will fall,'' he said. Japan's exports will remain firm as shipments elsewhere offset any drop in U.S. demand.

Another interesting news slip on Japan today was that Moody actually chose to upgrade the Japanese sovereign debt rating as what can only be interpreted as a signal of good faith directed at the new prime minister Yasuo Fukuda.

Japan's credit rating was raised one level to A1 by Moody's Investors Service, which said it's confident the government will reduce the world's largest debt.

The increase in the long-term local currency rating to the fifth-highest investment grade was the first by Moody's since it assigned Japan the top Aaa grade in 1993. The rating had been cut four times since 1998 as the nation's borrowings swelled to 1.5 times the size of the economy.

Prime Minister Yasuo Fukuda is tackling Japan's debt through spending cuts, Moody's Senior Vice President Thomas Byrne said in a statement. Japan owes 834.4 trillion yen ($7.1 trillion), the equivalent of the economic output of Asia- Pacific's next 16 largest economies combined.

Here at Alpha.Sources I certainly hope that Fukuda will be able to bring the house back in order on the back of the mess left behind by Abe. Yet, when it comes to the debt situation itself I fear that my hope is nothing but a fools kind, at best. In this way you cannot help but feel that the credit, as it were, extended to Fukuda from Moody represents a burden which may too hard to carry but here is definitely to hoping. Another perspective related to Japan's debt is this ...

``My view is that the downgrade many years ago was inappropriate because even though Japan's debt is huge, it's held by the Japanese and they are not about to dump those bonds,'' said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. ``So the upgrade is a natural response.''

Now, while I would like to reiterate here what Kanno says we also need to remember that the debt needs to be served no matter who holds the debt. This means that higher interest rate all things equal will make the servicing of the debt much higher and essentially impossible from the point of view of what many calls 'normalized' Japanese rates. Lastly, in the most unwanted event of a default (also merely on a part of the debt) we also need to remember how this actually might serve to be a disadvantage event for Japan since this would, with one devastating sweep, lower the stock of domestic savings in Japan which in the current long term economic situation is wholly unwanted and essentially would constitute a disaster.

* All quotes are from Bloomberg 

Japanclaus vistesen