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Bank of Japan decided to leave interest rates at 0.5% - for one more month?

June 15, 2007
By Ken Worsley


As Hisane Masaki points out in a piece at the Asia Times published tomorrow (?!?), most Bank of Japan watchers expect to see an interest rate increase come in August, if not July. We are in that camp as well.

That call looked just a bit more on today, as the Bank of Japan ended it’s June policy board meeting with the unanimous decision not to raise the nation’s benchmark interest rates. Ever vague, Fukui told reporters, “(the nine board members) have unanimously agreed that we must examine a number of factors before changing our policy.”

The Bank’s report said that the economy continues to expand moderately, is expected to continue to do so, and that future increases will happen gradually, in line with economic growth and (hopefully) price increases. The bank expects exports to continue to rise and household spending to rise as well, claiming that there is a “moderate rise in household incomes”.

All data thus far show that there is no solid basis for a claim that there has been a rise yet in household incomes.

Ever more puzzling, Fukui had this to say to the media: “It can’t simply be said that the yen’s weakness is a risk factor.”

Click the “read more” link below for the full text of the BOJ’s statement.

June 15, 2007
Bank of Japan

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.

On the price front, the three-month rate of change in domestic corporate goods prices has been positive, mainly due to the rise in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been around zero percent, due to earlier declines in crude oil prices.

Domestic corporate goods prices are expected to continue increasing in the immediate future, primarily reflecting the rise in international commodity prices. The year-on-year rate of change in consumer prices is expected to be around zero percent in the short run, with the effects of the drop in crude oil prices remaining. From a longer-term perspective, however, it is projected to continue to follow a positive trend, as the output gap continues to be positive.

As for the financial environment, the environment for corporate finance is accommodative. The issuing environment for CP and corporate bonds is favorable. Also, the lending attitudes of private banks have continued to be accommodative. Credit demand in the private sector has been increasing. Under these circumstances, the amount outstanding of lending by private banks has been increasing. The amount outstanding of CP and corporate bonds issued is somewhat above the previous year’s level. Funding costs for firms have risen slightly. Meanwhile, the year-on-year rate of change in the money stock is in the range of 1.0-2.0 percent. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.5 percent. Interest rates on term instruments have risen compared with last month. In the foreign exchange and capital markets, long-term interest rates have risen compared with last month, while the yen’s exchange rate against the U.S. dollar has fallen compared with last month. Stock prices have been around the same level as last month.

Filed Under Bank of Japan, Interest Rates, Monetary Policy 

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Comments

4 Responses to “Bank of Japan decided to leave interest rates at 0.5% - for one more month?”

  1. Alex Forshaw on June 15th, 2007 11:05 pm

    Would you agree that the BoJ ultimately must start raising interest rates, regardless of the inflation rate or lack thereof? The Nikkei’s performance weighted by pretty much any international currency basket has been atrocious. There is simply no reason to invest there. No?

  2. Ken Worsley on June 16th, 2007 1:26 am

    Alex, I absolutely agree they they must start raising interest rates, because they’ve talked themselves into that corner. There’s no doubt that Fukui wants it to happen again - at least once - before he steps down. Until now, their hands have been tied by political pressure (and weak CPI data, but that’s another story). After the Upper House election next month, things should be politically clear enough for them to make that move, which is why so many forecasters say July or August.

    Fukui has been saying that it will happen, it will happen. He has to say that to keep market players from getting too complacent and making sure it’s not such a shock when it does happen. The thing is, he’s been saying it will happen for so long that it’s going to have to happen for them to retain credibility, unless the fundamentals make it absolutely impossible.

  3. Alex Forshaw on June 16th, 2007 2:55 am

    What fundamentals could make that impossible? I assume you’re referring to zero/deflationary money supply… but does that even matter?

  4. Ken Worsley on June 16th, 2007 2:58 am

    Alex, I mean if there were sudden huge drops in wages, consumer spending, household spending, capex, industrial production or the core CPI. I don’t think any will have a huge drop over the next month, but I suppose we’ve seen stranger happen.

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