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BOJ keeps interest rates steady, hints at future raise

April 28, 2007
By Ken Worsley


Imagine a central bank raising interest rates while consumer prices are falling.

The idea might seem odd, but it’s starting to look as though it could make sense. Japan’s March Consumer Price Index data was obviously not heartening, showing a 0.3% drop from a year earlier. March was the second consecutive month with a decline after a 0.1% slide in February.

In reaction to this news, the Bank of Japan has reduced its estimated rise of core consumer prices for the financial year ending in March 2008 to 0.1%. If you’ve been following the Bank’s projections, you already know that they had been gunning for a 0.5% increase in CPI. That’s a significant revision and should raise questions concerning the Policy Board’s number crunchers - though it won’t at this point, since we really have to wait until April 2008 to see the final numbers.

For this month, the bank has decided to hold the 0.5% interest rate level, which makes sense given that March CPI “is pretty weak data and combined with shipment and inventory data, it is very, very weak,” According to Morgan Stanley’s Takehiro Sato.

It’s no secret that the Bank of Japan would like to raise interest rates as soon as possible, which means as soon as it is politically possible for the ruling party. As you can see by clicking on the image (courtesy Seeking Alpha), Japan’s interest rates remain far below the levels seen elsewhere in the OECD.

Can the bank raise rates in spite of shaky CPI data? It seems to be building it’s case, with Finance Minister Koji Omi lending support as well: “Today’s data does not change my view that as a whole Japan’s economy is recovering steadily.” I think that should go without saying, as consumer spending has continued to look better. At the same time, Omi’s comment is essentially irrelevant.

What does Bank of Japan Governor Toshihiko Fukui have to say? Luckily Reuters has helped us out with a string of quotes, of which this is my favorite justification for considering a rate hike:

If markets expect the BOJ to keep rates low even while the economy achieves 2.1 percent growth (as forecast by the BOJ), it could distort the BOJ’s policy scenario.

…are you for real? Does it not distort if markets expect a raise in rates as well? Or does it not distort in a way that makes you happy? It would be great to see reporters asking real questions at these news conferences…

Filed Under Bank of Japan, Interest Rates 

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One Response to “BOJ keeps interest rates steady, hints at future raise”

  1. Hiroko Ota Speaks Up on BOJ’s Policy Stance : Japan Economy News & Blog on December 2nd, 2007 10:35 pm

    […] Speaking to reporters at a press conference after a Cabinet meeting this afternoon, Minister of State for Economic and Fiscal Policy Hiroko Ota spoke up on the stance expressed recently by Bank of Japan Governor Toshihiko Fukui, who has continually held that the BOJ may raise interest rates despite the lack of an increase in consumer prices. […]

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