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Friday, Aug. 24, 2007

Wary BOJ leaves interest rate untouched


Staff writer

The Bank of Japan Policy Board agreed Thursday to keep its benchmark interest rate at 0.5 percent as the U.S. subprime mortgage crisis earlier this month added to uncertainties over the Japanese economy.

The decision was made in an 8-1 vote with board member Atsushi Mizuno the lone voice against keeping the rate unchanged. Mizuno also voted against maintaining the rate in the July meeting.

Before the market turmoil earlier this month, most watchers had predicted the central bank would raise the short-term rate to 0.75 percent at the two-day Policy Board meeting that ended Thursday.

But with the U.S. housing-loan crisis causing market turmoil worldwide — and Japan no exception — BOJ policymakers were forced to think twice. The 225-issue Nikkei average dropped to close at ¥15,273.68 on Aug. 17, the lowest level since Aug. 7, 2006, while the yen rose sharply against the dollar.

Speaking at a news conference, BOJ Gov. Toshihiko Fukui said chaos in the financial market led the central bank to maintain the current interest rate even though the fundamentals of Japan's economy may be improving since the July meeting.

"Even if economic figures show the Japanese economy may remain unchanged or has improved, we need to make a dynamic decision" based on both the economy and changes in the financial market, Fukui said.

The central bank will continue to closely monitor the global economy and how it affects the domestic economy, he said.

But Fukui also said the BOJ needs to keep the interest rate at a level that reflects the current economy.

Since the eruption of the U.S. subprime mortgage crisis, the BOJ has injected trillions of yen into the money market to help calm fears of a credit crunch in concerted efforts with U.S. and European central banks.

In the latest injection Tuesday, the BOJ poured ¥800 billion into the money market to curb a jump in the key interest rate.

In the U.S., the Federal Reserve cut its discount rate by half a percentage point to 5.75 percent on Aug. 17 in an effort to stabilize the U.S. and global markets.

Now with the BOJ firmly in support of the status quo, the question remains when the next interest rate hike will be. Many market watchers are betting on October, or even later.

Among those who believe October will be the earliest that the BOJ raises its key interest rate is Takahide Kiuchi, chief economist at Nomura Securities Co.

"Even if the confusion in the financial market subsides by next month, we need to take a close look at its influence on the economy," Kiuchi said. "Raising the rate in September would be difficult."

He added that Japan's economy would be thrown into chaos if financial organizations have a hard time procuring capital from the short-term money market, which would force companies to scramble for loans as well.

Yasuhide Yajima, senior economist at NLI Research Institute, agreed, saying the BOJ has no choice but to wait until October at the earliest, following an expected rate slash by the U.S. next month.

"It is unlikely the BOJ will raise its rate when the U.S. Federal Reserve is expected to cut" its federal funds rate target next month, he said.

Yajima pointed out that economic fundamentals are stable in Japan, the U.S. and Europe, judging from the balance sheets of companies worldwide.

But if it turns out that the market turmoil has caused significant damage to the global economy, the central bank would further delay the interest rate hike, Yajima said.

"Looking at the current situation, there is still a great possibility that the economy will shift to a downward trend," he said.

Any rate hike would be the third since Fukui ended the zero interest rate policy in July 2006. The latest hike was in February.



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