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BOJ Holds Rates Steady, as Expected

A few short months ago, we regularly laid odds on whether or not the Bank of Japan would vote to increase interest rates at its monthly policy meetings. For the past few months, however, the bank’s meetings have been virtual non-events, with everyone assured that there would be no chance that the BOJ would vote in a rate hike in the wake of the US subprime mortgage crisis.

At the close of its Policy Board meeting yesterday, the BOJ’s governors announced that they had voted 8-1 to keep interest rates as they are, with the uncollateralized overnight call rate to remain around 0.5%. This was the ninth consecutive month that the BOJ has voted to hold rates steady.

A few hours later, the bank released its Monthly Report of Recent Economic and Financial Developments for October, which begins with the line, “Japan’s economy is expanding moderately.” This, of course, is in the face of GDP having been down 0.3% in the April-June quarter. Generally, though, the BOJ’s statement seems valid, as other economic indicators seem to point that GDP will head back into positive territory for the July-September quarter, though just barely. Preliminary GDP figures for the July-September quarter should be published around November 13.

The BOJ’s report follows the above statement with:

Public investment has been sluggish. Meanwhile, exports have continued to increase. Corporate profits have been high, and business sentiment has remained generally favorable although it has become cautious in some sectors. Under these circumstances, business fixed investment has also continued to trend upward. Housing investment has fallen lately. Private consumption, however, has been firm in a situation where household income has continued rising moderately. With the rise in demand both at home and abroad, production has continued to be on an increasing trend.

Japan’s economy is expected to continue expanding moderately.

The bank goes on to note that the corporate goods price index has been rising, though when we look at it closely we see that the 1.9% increase from August was bolstered by an 11.6% rise in the price of steel and iron since last year, while the price of minerals went up 4.0% and no other category saw a price rise at 4.0% or above.

Conveniently, however, the bank’s report says nothing about consumer prices, which should be (at least part of) the bedrock of monetary policy. Consumer prices fell 0.1% in August, and core CPI has been down for seven straight months. The report also did not mention that its most recent Standard of Living survey indicates a strong degree of pessimism amongst the public, that consumer confidence is at a 32 month low, and that the Cabinet Office’s Economy Watcher’s survey has declined for six consecutive months.

Exports, however, are still on the rise. Consumer spending, on the other hand, represents about half of Japan’s economy.

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