BOJ Keeps Rate at 0.5% as Consumer Prices May Decline (Update4)
By Mayumi Otsuma
March 20 (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.
Tankan Survey
U.S. stocks slid last week as growing mortgage defaults heightened concern that the country's home-loan crisis is spreading. Fukui said the scale of the defaults in subprime mortgages probably wasn't large enough to alter the overall trend for the world's largest economy.
``The U.S. economy still appears to be heading for a soft landing,'' he said. ``Although the housing market has slowed, consumer spending is solid so we're still seeing a gradual expansion.''
Confidence among Japan's largest manufacturers probably slipped to 24 in March from a two-year high of 25 in December on concern a slowdown in the U.S. may crimp exports, according to the median estimate of 16 economists surveyed by Bloomberg News. A positive number means optimists outnumber pessimists. The central bank will publish the Tankan report on April 2.
Japan's economy is ``expanding moderately,'' the bank said after today's policy decision, keeping its monthly assessment unchanged from February, when it dropped language expressing concern that consumer spending was weak.
Land Prices
Fukui said the Bank of Japan will consider land prices and currencies in addition to economic and price data when setting interest-rate policy. The central bank said last month that it raised the key rate because low borrowing costs could spur wasteful investment and asset bubbles.
The U.S. Federal Reserve's benchmark rate is 5.25 percent and the European Central Bank's is 3.75 percent, encouraging investors to borrow yen to buy higher-yielding assets overseas.
The yen has risen more than 2 percent since the Feb. 21 rate increase, partly after a stock-market rout between Feb. 27 and March 5 erased $3.3 trillion in world market value and prompted investors to sell risky assets and repay yen loans.
``We need to continue to monitor market movements closely and in a calm manner,'' Fukui told reporters. ``This appears to be a healthy correction where markets themselves re-evaluated the way they take risks.''
Consumer Prices
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.
The world's second-largest economy grew 5.5 percent in the three months ended Dec. 31, the fastest pace in three years, the government said last week. Business investment led the expansion, climbing 3.1 percent, while consumer spending rose 1 percent, barely offsetting a 1.1 percent drop in the previous three months.
``Consumption remains incapable of becoming a locomotive for economic growth, and behind that is a slump in wages,'' said Jun Ishii, chief fixed income strategist at Mitsubishi UFJ Securities Co., who predicts the bank will next raise rates in October. ``The improvement of the corporate sector is failing to benefit households.''
Minutes of the two-day meeting will be published on May 7.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at
[email protected]
Last Updated: March 20, 2007 04:49 EDT