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Bank of Japan to convene meetings tomorrow: Rate hike in the cards? It’s fundamentally about the pressure…

We still see no provable empirical historical connection between interest rates and exchanges rates, but that’s not the way the media is presenting things: On February 12, Forbes announced:

Economic and political factors at home have made the Bank of Japan cautious about raising [interest] rates, but there is pressure from Europe and the United States for the Japanese authorities to take steps to strengthen the yen.

True enough, although with US Treasury Secretary Henry Paulson saying that the yen’s value, while low, reflects economic fundamentals in Japan, we’re going on the assumption that pressure from Europe might be a tad stronger at this point in time.

BOJ Governor Toshihiko Fukui echoed the same sentiment as Paulson on February 10th:

In deciding monetary policy, we are focused on the domestic economy and prices, trying to achieve sustainable economic growth and stable prices. We will also take into consideration the movements of the currency markets when we decide policy.

Of course, Fukui made this statement in an attempt to avoid answering a question over the possibility of a rate increase, but the sentiment is there: when the fundamentals say it’s time to raise the rates, we will raise the rates.

The Fundamentals and the Political Pressure

The questions to ask, then, are: Are the fundamentals there? And will the BOJ be put under the same political pressure as last time? We know that last week a 4.8% quarterly gain in GDP was announced, along with a 2.2% annual gain, although the accuracy of those figures has been called into question.

In other fundamentals, we saw Japan’s stock market trading at its highest level in almost seven years today, with the Nikkei 225 index rising 42.59 points, or 0.24 percent, to 17,918.24 - hitting its highest intraday level since May 2000. Bloomberg is reporting that the yen is gaining strength against the dollar in Tokyo trading, but fails to mention that the dollar has gained strength in New York trading.

My chart shows a test of the 119 area at about 5pm JST today, with the dollar gaining back to the 119.52 level right now. It actually looks as if the rate has entered a bit of a channel and will most likely remain there until the BOJ announces its decision tomorrow afternoon.

The Political Pressure

So, there are the fundamentals. They might be enough to justify a rate hike. What of the political pressure? A Bloomberg article from this afternoon quotes Chief Cabinet Secretary Yasuhisa Shiozaki as saying:

We want the Bank of Japan to make an appropriate monetary policy decision based on its professional knowledge. We’re not in a position to comment on its policy.

We should also note that Economic and Fiscal Policy Minister Hiroko Ota has been much quieter this month than last, when she came straight out and pleaded with the Bank of Japan not to raise rates.

One last morsel of goodness: Adam Richards of the Mutant Frog Travelogue alerted me to an Nikkei article this morning which described a recent statement by Secretary-General Hidenao Nakagawa. Remember that Nakagawa was instrumental in pressuring the BOJ to hold rates in January, saying that the BOJ must be in line with the government in a televised press conference and appearing on the news getting out of his car and going into the BOJ to sit in on their policy board meeting.

This time? Mr Nakagawa was in Sendai on Sunday, nowhere near Tokyo, where he avoided questions concerning the BOJ and simply stated: “The government and the central bank should coordinate their economic assessments and policy objectives.”

Vague, yes. Still in violation of the BOJ’s ‘independence?’ This observer tends to think so, although I’d like to see the BOJ grow a spine and prove me wrong. Then again, I don’t think the fundamentals are actually there for a rate hike, unless one prefers to go by some funny numbers.

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