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BOJ Leaves Interest rates at 0.5% - Monthly Economic Assessment Unchanged

July 12, 2007
By Ken Worsley


Earlier this afternoon, the Bank of Japan announced that its policy board had voted 8-1 in favor of keeping its benchmark interest rate (the unsecured overnight call rate) at 0.5 percent, as was widely expected. Later in the afternoon, it published its “Monthly Report of Recent Economic and Financial Developments” for July, which also remained unchanged from the previous month.

With today also being the official start to campaigning for the Upper House election on the 29th of this month, it seemed politically impossible for the bank to raise rates at this time. The existence of a dissenting vote (cast by Policy Board member Atsushi Mizuno) seems to make the case for a rate hike next month a bit stronger.

Perhaps more telling were comments made by BOJ Governor Toshihiko Fukui at a press conference after the announcement:

The majority of the nine (policy) board members agreed that they need to watch more economic data and more evidence that the economy and prices will continue moving as they expected in April…I firmly believe that the on-year change in the core CPI will rise gradually, judging from the positive GDP gap.

Fukui also alluded that the bank would have to watch how the economy would react to results from the upcoming election, which, unlike most of Japan’s parliamentary elections, does not have a clearly predictable outcome.

Two things must worry the bank at this point. First, despite Fukui’s comments on prices, the Consumer Price Index has fallen four consecutive months to May, and in spite of Fukui’s incessant claims that it will rise once last year’s high oil prices have been flushed out, that will most likely still leave CPI flat (if not falling) if fuel prices are stripped out of the current rate (although fresh food prices are stripped out in determining core CPI in Japan, fuel and energy costs are not).

Second, there is still much worry over what course the US economy will take, and if there will be widespread belt-tightening in the wake of a possible sub-prime mortgage crisis. Nonetheless, bearing in mind that approximately 55% of Japan’s economy is built on domestic consumer spending, CPI data and the recent Cabinet Office report that Consumer Confidence is abysmally low have to be the main worries on the minds of everyone at the Bank of Japan right now (other than Mr Mizuho).

What does this mean for August? This observer is still standing on my 60% chance of a rate hike next month. At this time, the deterrents (CPI, lower revised industrial production, worries over the US economy, and low consumer confidence) seem to be balanced out by the factors possibly motivating a rise.

The deterrents, however, may be piling up. Also earlier today, Hiroki Tsuda, the shiny new Vice Finance Minister, told reporters that the government:

…would like the BOJ to keep supporting the economy from the monetary side in order to keep the recent economic recovery sustainable…monetary policy is up to the Bank of Japan to decide.

Good thing he knows the roles. And where to put the pressure.

(More detail on the monthly economic assessment in an upcoming post)

Filed Under Bank of Japan, Interest Rates, Monetary Policy 

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Comments

3 Responses to “BOJ Leaves Interest rates at 0.5% - Monthly Economic Assessment Unchanged”

  1. Ivan Kitov on July 12th, 2007 10:56 pm

    “”I firmly believe that the on-year change in the core CPI will rise gradually, judging from the positive GDP gap.”

    I have not been looking at the Japan’s data since 2006. As I predicted, CPI and GDP deflator are consistently in the red zone. I do not understand the “belief” that something, including “GDP gap”, can actually help to overcome the Japanese deflationary trend. All known tricks are played, oil price rockets up and …no inflation.
    Central bankers and economists are rock solid in their conventional explanations, however.
    In fact, one can easily skip next two to three years of “belief” - do not screw up your good mood.

  2. Contrarian on July 13th, 2007 1:28 pm

    Probably the best solution would be for Japan to continue exporting goods and begin importing Americans. ;)

  3. John S on July 13th, 2007 1:59 pm

    continue exporting goods and begin importing Americans

    Ha…If you can find s way to count goods sold to Americans in Japan as exports, this might work…

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