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Friday, Jan. 19, 2007

Widely awaited BOJ rate hike a no-show

Split vote avoids clash with politicians


Staff writer

The Bank of Japan held its key short-term interest rate steady Thursday, confounding predictions of a rate hike by market-watchers and avoiding an expected clash with lawmakers.

But the 6-to-3 vote reflected growing momentum within the BOJ Policy Board that interest rates should rise. The split vote was the first since the BOJ ended its quantitative easing policy last March.

At the end of the two-day meeting, the board opted to maintain the overnight call rate at 0.25 percent, where it has been since last July.

Given that three board members voted for a hike, market analysts believe the BOJ will raise interest rates at its next meeting, on Feb. 20 and 21. The board is composed of the governor, two deputy governors and six others.

BOJ Gov. Toshihiko Fukui, the deputy governors and three board members backed Fukui's proposal to leave interest rates alone. But the three other board members made a separate proposal for a hike that was voted down.

The Nikkei 225 stock average took the news well, jumping 109.58 points to end the day at 17,370.93, its highest close in nine months.

"Some thought they should wait for additional information, analyze it and come up with a decision with stronger confidence," Fukui said after the meeting. "Others thought the board had deliberated enough and could make the decision now."

Fukui brushed aside criticism the central bank succumbed to pressure from the government and Liberal Democratic Party to leave rates alone this time around.

"Members decided by majority after carefully analyzing and deliberating the development of the economy and prices," Fukui said, calling the discussion comprehensive.

The BOJ has been looking for an opportune time to boost its benchmark short-term interest rate since its last hike in July.

Market-watchers first thought the BOJ would raise the rate in December but the central bank held off, citing weak consumption data.

Fukui said more data are needed before another move on rates can happen because economic indicators remain mixed. He added that consumption was rising, but at a moderate pace.

Some economists believe the BOJ made the right decision given the uncertainties over the strength of the economy, but it also created the impression that the bank caved in to political pressure.

Calls to raise the interest rate grew among Policy Board members as consumption indicators released at the end of December showed stronger than expected figures.

The decision to hold rates steady was made against a chorus of politicians urging the BOJ not to raise the rate as the economy is still weak.

Hidenao Nakagawa, secretary general of the ruling LDP, has repeatedly voiced opposition to a rise in rates, saying the government should exercise its right to call for a delay in the Policy Board vote to forestall a hike.

But on Tuesday, Finance Minister Koji Omi said the government did not need to call for the BOJ to postpone the vote. Omi's comment led to speculation that the government has given a tacit green light for a rate rise.

The BOJ Law allows the government to ask the board to postpone a decision on interest rates until its next meeting. If such a request is made, the board votes on whether to comply.

Under the law, government officials can take part in the board meeting and state their opinions, but they do not have a vote.

Government officials and politicians often oppose tightening by the bank, which they fear could hurt economic growth. Higher rates also force the Finance Ministry to pay higher rates on government bonds, while businesses suffer from higher debt-servicing costs as well.

The BOJ also released its monthly economic report Thursday, noting wholesale prices were "somewhat lower" than three months earlier, due to a drop in oil and copper prices.

Earlier, the BOJ had called wholesale prices "flat."

In its midterm review of October's Economic Outlook Report, the BOJ said the economy had slipped slightly from the outlook in the report due to weak private consumption.

Following the BOJ's decision to hold rates steady, Omi brushed aside suggestions of government pressure.

"We didn't put pressure on the Bank of Japan to keep the interest rate on hold. The BOJ reached its decision, not (as a result of) any pressure from the government or the ruling party." Omi repeated his view that the economy is recovering steadily, adding that the specific timing of a future rate hike is up to the BOJ.



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