Page 2 of 2 Japan hikes rates, yen
falls By Hisane Masaki
domestic price
trends, registered year-on-year negative growth
for the first time in two quarters in the
October-December period. The core Consumer Price
Index (CPI), which excludes volatile fresh-food
prices, rose 0.1% in December from a year earlier.
That was lower than the 0.2% increase in
November. Many economists say that the CPI will
reenter negative territory in the not-too-distant
future due to lower oil prices than year-earlier
levels. The Japanese
government has yet to officially declare an end to
deflation, the downward spiraling of prices that
plagued the nation for many years.
Last
month, the BOJ's policy board kept rates on hold,
amid formidable political pressure from Prime
Minister Shinzo Abe's government and the ruling
Liberal Democratic Party (LDP) against further
credit tightening. The nine members of the policy
board reached the decision by a vote of 6-3. The
three members who voted against the decision
called for rate hikes.
In the days before
the previous policy-board meeting in mid-January,
the BOJ faced mounting political pressure from
many within Abe's government and the LDP. They
feared that the rate hike would be too premature
and could choke off the current economic expansion
- casting a pall over the LDP-led coalition's
prospects in the crucial triennial election for
the House of Councilors, or the upper house of
Japan's Parliament, in the summer. They claimed
that domestic economic data, especially domestic
consumption and prices, were not strong enough yet
to warrant another rate increase.
Hidenao
Nakagawa, the LDP's secretary general and number
two man after Abe, who concurrently serves as
party president, went so far as to warn that the
ruling coalition might consider revising the BOJ
law to weaken the central bank's decision-making
power. He said 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.
Last month, the central bank may have just
opted to be on the safe side and left monetary
policy unchanged for purely economic reasons. But
the decision to keep rates steady left the
impression that the central bank had caved in to
political pressure.
At a press conference
held after the January policy board decision to
keep rates steady, Fukui took pains to dispel the
impression that the central bank gave in to
political pressure. "Our decision this time is
solely based on our careful examinations of
economic and price conditions. We never discussed
factors other than those conditions." Fukui said
at the time that the central bank needed to
analyze future economic data before changing its
monetary policy.
This time, however, there
have been less outspoken expressions of concern
from the government, although ministers still
sounded cautious.
"I trust that [the Bank
of Japan] will make an appropriate decision based
on a comprehensive assessment of prices, the
economy and the risks involved," Abe said on
Monday. Economy Minister Hiroko Ota echoed Abe,
saying: "I think the Bank of Japan will make a
judgment after thorough analysis of economic and
price data." Finance Minister Koji Omi said:
"Although the Japanese economy continues
recovering, I want the BOJ to support the recovery
through its policies," but he declined to comment
on specific BOJ decisions.
Opponents of
rate hikes within the LDP-led coalition apparently
have toned down their rhetoric against the BOJ to
avoid continued public disagreement, which would
be embarrassing for both sides as it gives the
strong impression that they are deeply in disarray
over macroeconomic policy management.
The
BoJ's stance on rates has significant implications
for the entire world economy. Capital markets are
sensitive to moves by the central bank because
institutional investors, including hedge funds,
are heavy users of yen carry trades, in which they
procure the yen at a cheap rate and invest in
high-yielding financial products, including stocks
and currencies of emerging economies.
Therefore, any rise in the value of the
yen in reaction to the BoJ's credit tightening
could affect their profitability. This time
around, however, Fukui's endorsement of "gradual"
tightening appears to have been taken by the
markets as insufficiently hawkish to impact on the
carry trade for the present. As a result, the yen
dropped from 119.75 to the US dollar just before
the BOJ announcement, to around 120.5 in the late
afternoon (Japan time). Meanwhile, the yen
carry trades, coupled with extremely low interest
rates in Japan, have contributed to the drop in
the value of the yen against other major
currencies. This week, the euro has been trading
around 158 yen and the US dollar has been changing
hands around 120 yen.
European
participants in the recent meeting of the Group of
Seven (G7) finance ministers and central bank
governors in Germany expressed dissatisfaction
with the cheaper yen. Germany and other European
countries have expressed concerns that the euro's
appreciation in tandem with the yen's depreciation
hurts European firms' competitiveness.
US
Treasury Secretary Henry Paulson, sticking to a
strong-dollar policy, has said exchange rates
should be determined by market forces. But there
is mounting pressure for a weaker dollar vis-a-vis
the yen even in the US, especially in the
Democrat-controlled Congress and auto industry,
which is struggling with increasingly tough
competition from Japanese automakers led by Toyota
Motor Corp.
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.
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 December, the lowest since the Plaza Accord,
when the figure stood at 94.8 against the March
1973 base of 100.
A statement issued at
the end of the recent G7 meeting in Germany also
pointed out the need to closely monitor hedge
funds, which handle a vast amount of funds.
Yen-carry trades are increasing, and if the
management of hedge funds becomes difficult due to
rapid fluctuation of exchange rates or other
factors, a global financial crisis might erupt,
many experts warn.
Hisane Masaki
is a Tokyo-based journalist, commentator and
scholar on international politics and economics.
Masaki's e-mail address is yiu45535@nifty.com
(Copyright 2007 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
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
