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Bank of Japan holds interest rates steady, Fukui wants to keep you guessing

May 18, 2007
By Ken Worsley


Yesterday, the Bank of Japan announced that it would keep its overnight call rate target unchanged at 0.50 pct for the fourth straight month. There were no surprises with that decision - in fact, the BOJ’s 9 governors voted unanimously to hold interest rates where they are.

In the bank’s “Monthly Report of Recent Economic and Financial Developments for May 2007,” which was released the same day, this assessment of the state of the economy was given:

Japan’s economy is expanding moderately.

Public investment has been declining as a trend, although it has recently been flat. Meanwhile, exports have continued to increase, and business fixed investment has also continued to increase against the background of high corporate profits. Household income has continued rising moderately, and in this situation, private consumption has been firm. Housing investment has been increasing moderately with some fluctuations. With the rise in demand both at home and abroad, production has also been on an increasing trend.

Japan’s economy is expected to continue expanding moderately.

Exports are expected to continue rising against the background of the expansion of overseas economies. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to remain on a downtrend.

Sounds great. There is the noticeable absence of slowed GDP growth, and also of the fear that exports may slow due to impending sluggishness in the US economy. Such factors would not fit into Governor Toshihiko Fukui’s agenda of keeping the markets on their toes and guessing at when the next raise might be.

Fukui has made it clear that the Bank of Japan can and might raise rates even if prices continue to not increase. Last week, Fukui said that Japan’s interest rates are ‘excessively low’ when compared to future projections of the country’s economic strength and that they would have to rise in order to avoid overinvestment and inflation.

As Fukui said himself at the news conference yesterday:

Looking ahead, interest rate hikes will be needed to achieve sustainable economic growth with price stability. But we have no pre-timed schedule on future rate hikes. We will gradually raise rates while closely watching for possible risks, and whether the economy and prices move as we expect.

Consumer spending has increased somewhat, and that is certainly on the Governor’s mind. I’m sticking to my guns, however: There is no way the Bank will raise rates again before the Upper House election in July. Fukui’s job is to keep people (and the markets) guessing, and I suppose that, in turn, creates plenty of jobs in the guessing industry.

Filed Under Bank of Japan, Economic Reports, Interest Rates 

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Comments

2 Responses to “Bank of Japan holds interest rates steady, Fukui wants to keep you guessing”

  1. Bearish Investor on May 18th, 2007 11:11 am

    It’s interesting that years of easy money in Japan have not achieved the desired results. It just proves that you can lead a horse to water, but you can’t make it drink. You can offer Japanese people easy money, but they are apparently too smart to take it. The same doesn’t hold true for Americans who extended their arms toward the easy money and created a housing bubble.

    P.S. Who does the open market operations in Japan? I read somewhere that, while we tend to blame/credit the BOJ, it’s actually the ministry of finanace that carries out the open market operations that affect rates (unlike the U.S. where the Federal Reserve is responsiible).

  2. Ken Worsley on May 21st, 2007 6:32 pm

    Bearish Investor: Sorry I’m late with the reply…

    The short answer is that the Ministry of Finance carries out Japan’s market operations.

    The longer answer:

    The Ministry of Finance, dating back to the 6th century, far predates the Bank of Japan, which was founded in the Meiji Era. MOF is charged with both drawing up the national budget and managing Japan’s foreign reserves. The task of watching over Japan’s foreign reserves falls to the Vice Minister of Finance for International Affairs. Currently that is Hiroshi Watanabe. Mr Watanabe has been in that position since 2004, and with the Ministry of Finance since 1972. He previously served as Deputy Vice Minister to former Minister of Finance Kiichi Miyazawa, which should give some insight as to his influences. He’s a proponent of Asian monetary cooperation.

    The International Bureau is one of the five bureaus in the Ministry of Finance’s structure. Within the IB is the Foreign Exchange Markets Division, which is where the maintenance of Japan’s foreign reserves actually goes on.

    But, here’s where it gets complicated. Yes, the Ministry of Finance carries out the market operations - and also the smoothing operations. But, MOF cannot operate with anything resembling true independence. The Minister of Finance is a Cabinet Member, and as such, serves as a political appointee of the Prime Minister. He (or she, someday) also sits on the 経済財政諮問会議, or Council on Economic and Fiscal Policy. This means that not much can be done by the MOF without a soul-crushing amount of time being spent in meetings and deliberations. Cabinet meetings, CEFP meetings, Ministerial meetings…things tend to get slowed down, watered down, and leaked along the way.

    So…yes, the Ministry of Finance carries out the market operations. But no, they do not decide what to do and when to do it on their own. They propose what to do and need to have those proposals approved by the Cabinet and at least smiled upon by the CEFP (though the CEFP has to send one member out to the media to disagree with what they do).

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