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3 Markets play guessing games over
Bank of Japan By Hisane Masaki
TOKYO - Japan's financial markets are
abuzz with two questions: How many more times will
the Bank of Japan (BOJ) raise interest rates
before its governor, Toshihiko Fukui, almost
certainly steps down in a year's time, and then
who will step into his shoes?
The
71-year-old Japanese central bank chief's
five-year term of office expires next March. He
has said he "does not bear in mind" his possible
reappointment. Many analysts predict that the BOJ
will raise rates twice by next March - each time
by a quarter
percentage point - to 1% from
the current 0.5%.
Meanwhile, with nearly a
year still left before Fukui's term expires,
Japan's financial markets are already full of talk
about who will take over the helm of the central
bank. At the moment, many people are betting on
Toshiro Muto, one of the two BOJ deputy governors
and a former top Finance Ministry bureaucrat. But
a few other names are also being mentioned,
including, as a dark horse, Heizo Takenaka, former
prime minister Junichiro Koizumi's economic czar.
When Fukui took the reins at the Japanese
central bank in March 2003, short-term interest
rates were zero. In March 2006, the BOJ scrapped
its five-year-old "quantitative easing" policy and
returned to a more conventional regime of using,
as a monetary adjustment target, the unsecured
overnight call rate, rather than the outstanding
balance of current-account deposits held by
private financial institutions at the central
bank.
It was the first time in about 15
years, except a brief period in which the BOJ
hastily lifted the zero-interest rate policy from
the summer of 2000 to early 2001, that the central
bank had reversed its policy to one of tightening.
The quantitative easing policy was aimed at
defeating deflation, which long plagued the
Japanese economy by depressing corporate earnings
and wages. Under the quantitative easing policy,
which the BOJ introduced in March 2001, the bank
flooded the nation's financial markets with excess
cash in the hope of encouraging borrowing and
lending, while anchoring short-term interest rates
at near zero.
Last July, the BOJ ended its
unusual zero-interest policy of nearly six years
as the world's second-largest economy was
continuing to recover and gaining strength after a
decade in the doldrums. At the time, the BOJ
raised its target for the unsecured overnight call
rate, which the BOJ uses as the key target rate in
the short-term money market, to 0.25% from in
effect zero and the official discount rate to 0.4%
from 0.1% per annum.
Before last July's
rate hike, the BOJ had last raised rates in August
2000, when it increased the overnight call rate to
0.25% from zero, despite opposition from the
government.
The zero rates had been in
place since February 1999. But as the nation's
economic woes deepened soon afterward in the wake
of the burst of the dot-com bubble in the US, the
BOJ faced a barrage of criticism for prematurely
lifting the zero-interest rate policy. It was
forced to lower the rate to 0.15% in February 2001
and then to zero again in March 2001, where it
stayed until last July.
This February, the
BOJ raised rates by a quarter percentage point
again to 0.5% from 0.25%, in an attempt to rectify
what the central bank itself views as the
"abnormal" state of the credit policy. The
official discount rate - which serves in effect as
the cap on the overnight interbank rate, because
the BOJ provides loans to banks at the rate
through its Lombard-type lending facility - was
also jacked up to 0.75% from 0.4% per annum.
February's hike in the overnight call rate
marked the first time since September 1998 that
the key policy rate had been set at 0.5% or
higher. But the 0.5% rate is still unusually low
by international standards. Fukui has repeatedly
cited the dangers of keeping an ultra-easy
monetary policy for too long and emphasized the
need to carry out phased, small-margin
interest-rate hikes to achieve sustained economic
growth in the medium and long terms.
The
BOJ has been cautious, and will probably be so for
a while, about rate hikes, however, as personal
consumption - a main engine of growth accounting
for about 55% of the nation's gross domestic
product - remains weaker than expected, and prices
have failed to rise as much as expected in recent
months.
The government has yet officially
to declare an end to deflation. Despite recent
weak data on consumer prices, however, it is
highly unlikely that the Japanese economy will
slip back into the abyss of deflation. A
government survey released on March 22 showed that
Japan's land prices rose for the first time in 16
years in 2006, offering further evidence that the
nation is emerging from deflation with support
from a steady economic recovery.
Fukui has
said in the past year that the driver of Japan's
economic growth would gradually shift to consumer
spending from corporate investment. But that
apparently has not yet happened. Consumption is
weaker than expected, largely because of lagging
income gains.
Even if salaries rise more
quickly, many households appear more likely to
choose to rebuild savings rather than spend. Most
Japanese are increasingly concerned about a
possible sharp surge in social-security and tax
burdens amid the rapid aging of society and
declining birth rates. In 2005, Japan's population
began to decline for the first time since World
War II. The country's working population had begun
to shrink several years earlier.
Experts
warn that the country's social-security systems -
such as pensions, health care, and nursing care
for the elderly - will
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