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Wednesday, Nov. 14, 2007

BOJ leaves key rate unchanged amid U.S. subprime loan crisis

Staff writer

The Bank of Japan Policy Board kept its benchmark short-term interest rate at 0.5 percent Tuesday as the U.S. subprime mortgage loan crisis continues to impact the global markets.

At the end of its two-day monthly meeting, the board voted 8-1 to maintain the current interest rate. Atsushi Mizuno cast the sole vote for a rate hike. He has been voting for a rate increase since July.

The decision was anticipated by market watchers. In a survey compiled by the Cabinet Office last week, almost all economists predicted that the BOJ won't raise the interest rate until next year.

Analysts said the BOJ would find it difficult to carry out a credit squeeze after the U.S. Federal Reserve cut its rates and the European Central Bank put a hold on its credit tightening drive.

BOJ Gov. Toshihiko Fukui stressed that the central bank will continue to closely monitor how the U.S. subprime mortgage upheaval affects the global and Japanese economies.

"If the risk factor (of the subprime woes again) surfaces, the global economy will enter a downturn," depending on the extent of the damage, Fukui said at a news conference after the meeting. "And the Japanese economy may be influenced by it."

Fukui said the U.S. economy is likely to see a further slowdown in the October-December quarter, citing the shrinking housing market and financial institutions' reluctance to lend money.

"But afterward, the U.S. economy is likely to be on a path of steady growth based on a soft-landing scenario," he said.

Still, Fukui added that if housing consumption sharply declines and financial institutions see further losses in the U.S., it could trigger a credit crunch and dampen consumer sentiment.

"In that case, the U.S. economy may slow down more than we imagine," he said.

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The Japan Times

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