Bank of Japan Keeps Rates on Hold

The Bank of Japan on Wednesday lowered its forecasts for growth and inflation this year and held interest rates steady, but maintained its view that the country’s economy was likely to continue its sustained expansion.
Financial Times 10/31/2007 12:14:49 PM

At its monetary board meeting, Japan’s central bank kept the overnight call rate target unchanged at 0.5 per cent, as widely expected, reflecting the growing risk of economic slowdowns in the US and Japan and continued uncertainty in financial markets.

In its Outlook Report, a semi-annual report on the economy and prices, the BoJ cut its forecast for real gross domestic product growth for the year to March 2008 from 2.1 per cent in April to 1.8 per cent, and its forecast for consumer price inflation to 0.1 per cent from 0.2 per cent.

The bank highlighted uncertainties regarding overseas economies and global financial markets”.

To be frank, the downside risks have increased,” Toshihiko Fukui, the BoJ’s governor, told a press conference.

The report strengthened the view that the bank was unlikely to raise rates again this year.

However, the central bank reiterated its opinion that the economy would expand at a moderate pace and upward pressure on prices would gradually increase, and said it intended to raise interest rates gradually in accordance with improvements in the economic and price situation”.

While the BoJ’s decision to keep rates on hold came as no surprise, analysts described its view of the economy as optimistic.

It was more hawkish than I thought [it would be],” said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

The central bank acknowledged the greater downside risks due to the US housing downturn and consequent volatility in global financial markets, but said: The adverse effects . . . on the Japanese economy have been limited.”

It added: A virtuous circle of growth in production, income and spending is expected to remain in place”.

Mr Fukui reiterated the BoJ’s long-held fear that sustained ultra-low interest rates could stimulate bubble-like conditions in some asset markets.

Loose monetary conditions could lead people in the financial markets to take positions that go too far,” he said.

However, economists said signs were growing that the recovery of Japan’s economy was starting to lose steam.

Earlier this week, government data showed the unemployment rate rose unexpectedly for the second consecutive month in September, to 4 per cent from 3.8 per cent.

Housing starts have also tumbled, due to regulatory changes which tightened the building approval process.

Masaaki Kanno, senior economist at JPMorgan, said business sentiment had deteriorated, summer bonuses were lower and since this spring input costs have been rising while at the same time demand has been falling”.

The BoJ was focused on the long-term upside risk at a time when the near-term risk was skewed to the downside, said Mr Kanno. This is very surprising. It is a very optimistic outlook,” he said.

Bank of Japan Keeps Rates on Hold