Page 3 of 3 Will BOJ tell Tokyo to take a
hike? By Hisane Masaki
deflation and consumption is
weak - the Bank of Japan must be sharing these
points," Ota said, adding, "To exit deflation is
the most important goal this year.
Low interest rates need correcting eventually, but
what is important is the timing."
Hidenao
Nakagawa, the most vocal opponent of credit
tightening, said: "There is no logical reason for
the BOJ to implement a
policy change this month
after having decided in December" not to raise
rates. LDP policy chief Shoichi Nakagawa agreed
with the party secretary general and cautioned
against rate hikes. "Household spending and
personal consumption are still weak," he said.
"Now is not the time to raise interest rates."
Hidenao Nakagawa, the LDP's No 2 man after
Abe, who concurrently serves as party president,
also suggested that the government exercise its
right to ask the BOJ to postpone the Thursday vote
if the bank seeks to tighten credit. Under the
current rules, the BOJ can reject such a request,
as it did in the summer of 2000.
The LDP
secretary general went so far as to warn that the
ruling coalition might consider revising the law
to weaken the central bank's decision-making
power. He said that if the BOJ "cannot unify its
judgment on the economy and policy targets to
conform to those of the government, it will
represent a major flaw in the legal system". The
BOJ Law was revised in 1997 to strengthen the
central bank's independence from the government.
The revision took effect the following year.
Two government representatives - one from
the Finance Ministry and another from the Cabinet
Office - attend the policy board's meetings as
observers. They can invoke their rights to request
the postponement of a board vote on a policy
change until another meeting. The board decision
is made by a majority vote. The two government
observers have no voting rights.
Finance
Minister Koji Omi said, however, that he sees no
need for the government to ask the BOJ to delay
any decision to raise rates this week. "I don't
think we're at a state where we should use the
right to request postponement of voting," Omi
said. "Looking at the current economic conditions,
I think the economy is on a sound footing."
The government last exercised its right to
request the postponement of a board vote in August
2000. The BOJ rejected the request and increased
the overnight call rate to 0.25% from zero, the
last rate hike before last July. But as the
nation's economic woes deepened soon afterward in
the wake of the burst of the dot-com bubble in the
United States, the BOJ faced a barrage of
criticism for prematurely lifting the
zero-interest-rate policy.
To be sure, the
BOJ apparently wants to avoid an open
confrontation with the LDP-led coalition
government. But at the same time the central bank,
as a market watchdog, apparently does not want to
see market confidence in its policy hurt by
yielding to political pressure or even just giving
the impression that it has done so.
Some
pundits also say that the BOJ has been very
cautious about raising rates because it remains
traumatized by its policy debacle in the summer of
2000, when it prematurely lifted - and was forced
to restore only months later - its
zero-interest-rate policy.
Currency
markets Japan's interest rates are now the
lowest among industrialized countries. A gap
between interest rates in Japan and those in the
US and Europe has contributed to the recent
weakening of the yen against the US dollar and
euro. A cheaper yen has significantly contributed
to Japan's robust exports by making them more
competitive abroad and thereby shored up the
current economic recovery.
The BOJ's
postponement of anticipated rate increases last
month, combined with monetary tightening by the
European Central Bank, sent the euro soaring to
the record-high 158-yen level at one stage. It
remains to be seen, however, whether possible rate
hikes in Japan this week alone would lead to an
immediate reversal of the yen's recent weakening
trend.
Despite growing talk of rate hikes
by the BOJ this week, the yen has been on a weaker
note vis-a-vis both the US dollar and the euro in
recent trading sessions, with the greenback being
traded at about 120 yen while the common European
currency is quoted at about 155 yen.
Capital markets are also sensitive to
moves by the BOJ because institutional investors,
including hedge funds, are heavy users of carry
trades, in which they procure the yen at low costs
and invest in high-yielding financial products,
including stocks and currencies of emerging
economies. Therefore, any possible rise in the
value of the yen in reaction to possible credit
tightening by the BOJ could affect their
profitability.
To be sure, the value of
the yen is about two times where it was when major
economic powers agreed on the Plaza Accord in
September 1985 to correct an excessively strong
dollar. But the real effective exchange rate for
the yen has been much weaker. The BOJ's
trade-weighted measure of the yen's performance
against major trading partners slipped to 100.6
last month, the lowest since the Plaza Accord,
when the figure stood at 94.8 against the March
1973 base of 100.
Hisane Masaki
is a Tokyo-based journalist, commentator and
scholar on international politics and economy.
Masaki's e-mail address is yiu45535@nifty.com.
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