Page 1 of 3 Will BOJ tell Tokyo to take a hike? By Hisane Masaki
TOKYO - As the Bank of Japan (BOJ) began a two-day meeting of its policy board
on Wednesday, global markets focused on whether the central bank of the
world's second-biggest economy will actually raise interest rates, as expected
by many analysts.
The nine members of the BOJ's decision-making body, including governor
Toshihiko Fukui, exchanged views on the current state of the Japanese economy
and prices on the first day of their
meeting. They are to decide on Thursday whether to make the first rate
hike in six months.
With the economy gaining strength after a decade in the doldrums, the central
bank ended its unusual zero-interest policy of nearly six years last July. The
BOJ raised its target for the unsecured overnight call rate, which it uses as
the key target rate in the short-term money market, to 0.25% from effectively
zero. The BOJ has since been cautiously weighing the timing of its next rate
hike.
The current meeting of the BOJ policy board comes amid growing speculation
among many analysts that the unsecured overnight call rate will be raised by a
quarter percentage point to 0.5%.
As of Wednesday noon, a majority of the BOJ's policy board members were
believed to be favoring the rate hike, but some members were believed to be
advocating holding off on increases until February or later, insisting that the
domestic economic data, especially domestic consumption and prices, are not
strong enough yet to warrant another rate rise.
It appeared still possible that the BOJ would opt to be on the safe side and
leave monetary policy unchanged. Expectations of a rate hike receded in the
Tokyo foreign-exchange market Wednesday morning, pushing the yen lower against
the US dollar and the euro.
This week's meeting of the policy board also comes amid mounting political
pressure from many within Prime Minister Shinzo Abe's government and the ruling
Liberal Democratic Party (LDP) against further credit tightening.
They fear that a rate hike could choke off the current economic expansion - now
the longest since the end of World War II but apparently on a far from solid
footing - and so cast a pall over the LDP-led coalition's prospects in the
crucial triennial election for the House of Councilors, the upper house of the
Diet (parliament), this summer.
For Abe, who took office last September, succeeding Junichiro Koizumi, the
upper house vote will be his first major electoral challenge, and its results
might determine his political fortunes. His widespread popularity swept Abe to
power, but his honeymoon with the public seems to be over. According to opinion
polls, the public support rate for his cabinet has been plummeting
precipitously in recent weeks. This augurs ill for him and his LDP ahead of the
election.
Meanwhile, Fukui has repeatedly said there is a need to carry out phased,
small-margin interest-rate hikes to achieve sustained economic growth in the
medium and long terms, although he has been careful not to drop any hint of
specific timing. If rates are actually hiked on Thursday, even opponents
within the LDP-led coalition might tone down their rhetoric against the BOJ to
avoid a continued public disagreement that would be embarrassing for both sides
as it gives the strong impression that they are deeply in disarray over
macro-economic policy management.
Increasingly confident BOJ
In the previous meeting of its policy board on December 18-19, the BOJ held off
tightening monetary policy because of concerns about weak domestic consumption
and smaller-than-expected rises in prices, among other reasons.
Although the BOJ's closely watched quarterly tankan survey, released on
December 15, showed that optimism among Japanese companies was at its highest
level in two years, revised government figures, released on December 8, showed
that Japan's economy was growing more slowly than predicted.
Gross domestic product (GDP) in the July-September period grew 0.2% from the
preceding quarter in real terms, or after adjustment for inflation, compared
with the 0.5% growth announced earlier. This revised figure translates into an
annualized pace of 0.8%, compared with the 2% announced earlier. The government
said the main reason for the disappointing economic figures was a drop in
domestic demand, which contracted by 0.2% from the previous three-month period.
The decline in domestic demand was largely due to a 0.9% drop from the previous
quarter in personal consumption, a main component of economic activity
accounting for about 55% of the nation's GDP. Secretary general Hidenao
Nakagawa of the LDP said the bank's termination of its zero-rate policy last
July may have contributed to the economic slowdown in the July-September
quarter.
Fukui has said since last spring that Japan's economic growth would gradually
rely more on consumer spending than corporate investment. But that has not yet
happened. Consumption is weaker than expected, largely because of lagging
income gains. Japanese wages still have not reversed their decade-long slide
even with the country's longest postwar economic expansion.
Even if salaries rise more quickly, many households may choose to rebuild
savings rather than spend. Most Japanese are
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
