BOJ keeps rates steady in uncertain times

BOJ keeps rates steady in uncertain times


TOKYO – The Bank of Japan (BOJ) left interest rates unchanged at 0.5 per cent on Tuesday, as expected, opting to take more time to determine when the fog will clear from the economy – both in Japan and around the world.


Uncertainty over the global economy and soaring energy and raw material costs are adding to concerns that growth is weakening in the world’s No 2 economy, but the BOJ’s room to move is constrained as Japan’s interest rates are already very low.


The central bank’s policy board, currently seven members, voted unanimously to keep its key policy rate at 0.5 per cent.


With no surprise in the rate decision, traders are waiting for BOJ Governor Masaaki Shirakawa’s post-meeting news conference, set to start at 3.30pm (0630 GMT), to hear what he has to say about rising prices of food and commodities and their impact on the economy.


At its last policy meeting about three weeks ago, the BOJ dropped a two-year bias towards raising rates and took a neutral stance on monetary policy, saying it was inappropriate to predetermine its future policy direction given high uncertainty.


Many market players expect the central bank to sit tight for some months before eventually raising rates – possibly around the end of this year or early next year – given a perception that the worst of the credit market turmoil is over and that the Federal Reserve could raise US rates later this year.


‘We are now at the stage where we need to pay utmost attention to the downside risks to the economy,’ Mr Shirakawa said last week.


But he also revived the BOJ’s mantra of adjusting Japan’s low rates towards more normal levels, a phrase dropped in the BOJ’s twice-yearly outlook report on April 30.


‘We need to bear in mind that real short-term interest rates are around zero, a very low level. So if we are certain that the Japanese economy will follow a growth path under stable prices, we will be adjusting interest rates,’ he said.


Swap contracts on the overnight call rate show investors a roughly 60 per cent chance of the BOJ lifting rates by the end of this year up from a 35 per cent chance early last week.


Growth in Japan has so far held up better than economists had expected. Gross domestic product grew 0.8 per cent in the first quarter, thanks to strong exports that have so far weathered a US downturn.


But the data also showed firms cut investment as they braced for slowing global growth and high energy costs to take its toll on Japan, underscoring the view that the domestic economy would slow in the current quarter.


BOJ sources had said before the data was released that GDP figures would not change their view on the economy much.


Weak machinery orders figures released last week pointed to a slowdown in capital spending ahead, making it harder for the BOJ to justify any rate hike in the near future.


In further evidence that the corporate sector, which has led Japan’s growth, is suffering, the nation’s manufacturers turned pessimistic for the first time in five years in May, according to a Reuters survey released on Monday.


Still, most economists say a rate cut is unlikely as Japan’s real interest rates are very low, with the BOJ’s overnight call rate target of 0.5 per cent well below annual consumer inflation of 1.2 per cent.


The nine-member BOJ policy board currently has two vacancies, including one for a deputy governor, but there has been almost no public talk among lawmakers about who should fill the positions.


But with the current parliamentary session ending in less than a month, discussions may resurface in the coming weeks. – REUTERS


Source: Business Times

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