April 6 (Bloomberg) -- Japan's central bank will probably keep interest rates unchanged next week after consumer prices fell and recent data signaled U.S. growth is cooling.
Governor Toshihiko Fukui and his policy board will keep the key overnight lending rate at 0.5 percent, the lowest among major economies, according to all 49 economists surveyed by Bloomberg News. The bank doubled the key rate in February.
Confidence of Japan's largest manufacturers slipped from a two-year high on concern that a U.S. slowdown may hurt exports of cars, flat-panel televisions and digital cameras, the central bank's quarterly Tankan business survey showed this week. A decline in consumer prices for the first time in 10 months provided further reason to delay a rate increase.
``The prospect of a U.S.-led global slowdown is a major headwind for Japan,'' said Julian Jessop, chief international economist at Capital Economics in London. The U.S. outlook ``may be decisive in keeping Japanese rates on hold.''
The bank has raised rates twice since July last year and Deputy Governor Toshiro Muto this week said borrowing costs need to be raised gradually in line with the economy's expansion. Giving companies and investors the impression rates will stay very low regardless of the economy's strength could cause the ``misallocation of resources,'' he said.
Service Companies
The Tankan survey showed a mixed picture of Japan's economy. Large manufacturers plan to increase spending by 2.5 percent in the year that began April 1, more than economists expected. Large service companies stayed the most optimistic they've been in 15 years and aim to boost investment 3.1 percent.
``Solid numbers among non-manufacturers signal a rebound in consumption at home and gross domestic product will probably show a brisk expansion in the first quarter,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities Japan Ltd. ``The direction of the U.S. economy is the biggest risk for Japan.''
Yamazaki said he expects the bank to put off a rate increase until the fourth quarter, when the effect of bad subprime loans on the U.S. economy will probably fade.
Japan's largest export market may be losing steam. U.S. factories expanded at a slower pace in March than the previous month, and new home sales fell to the lowest level in almost seven years in February. Subprime borrowers, typically people with limited or poor credit histories, fell behind on their mortgage payments at the highest rate in four years last quarter.
Optimistic About U.S.
Muto said the U.S. economy will probably achieve a soft landing, with growth returning to potential even if it temporarily slows. Subprime loan defaults probably won't hurt the country's overall growth, he said.
``Bank of Japan policy makers aren't pessimistic about the U.S. outlook, but it's unlikely that the economy will achieve a V-shaped recovery and quickly dispel the uncertainty about global growth,'' said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Securities Japan Co. The bank will probably raise rates in August or September, Kanno said.
The prospect that consumer prices may keep falling in coming months also damped speculation for any early rate increases. Core consumer prices, which exclude fresh food, declined 0.1 percent in February from a year earlier, the first drop since last April.
Governor Fukui said last month that prices will hover near zero in coming months but remain on a rising trend in the long run. Core prices won't stop sliding until around October, when the effect of cheaper oil eventually abates, said Teizo Taya, a former Bank of Japan board member.
Price Outlook
``The central bank is seeking to normalize interest-rate levels, but it can't raise rates by ignoring monthly core price data,'' said Taya, now adviser to Daiwa Institute of Research.
Weak price data may prompt the bank to cut its forecast for inflation for a second time in a year when it releases a semi- annual report on April 27, said Richard Jerram, chief Japan economist at Macquarie Securities Ltd.
The bank said in October core prices would rise 0.5 percent in the year that started this month, revising down its estimate from 0.8 percent in April. The revision followed the government's reshuffle of items in the consumer price index in August.
``The Bank of Japan has no ability to forecast inflation,'' Jerram said. ``If you can't demonstrate any ability to predict what will happen, then you have to question whether it's legitimate to base policy decisions on such uncertainty.''
Some economists said there's a chance the bank will raise rates before Upper House elections in July should evidence of a U.S. rebound emerge, even amid falling prices.
``It's possible the bank will attempt a rate hike in May or June if it can become confident the U.S. economy will regain stability later this year,'' said Hiromichi Shirakawa, a former BOJ official and now chief economist at Credit Suisse in Tokyo.
The central bank will announce its policy decision at the conclusion of a two-day meeting on April 10. It will release its monthly economic assessment at 3 p.m. that day and Governor Fukui will hold a press conference at 3:30 p.m.
Subscribe to:
Post Comments (Atom)
1 comment:
BOJ Holds Rate at 0.5% Amid Price Slump, U.S. Concern (Update1)
April 10 (Bloomberg) -- The Bank of Japan kept interest rates unchanged for a second month after consumer prices fell and recent data signaled U.S. economic growth may slow.
Governor Toshihiko Fukui and his policy board colleagues voted unanimously to hold the key overnight lending rate at 0.5 percent, the lowest among major economies, the bank said in a statement today in Tokyo. The decision was expected by all 49 economists surveyed by Bloomberg News.
Confidence among Japan's largest manufacturers slipped from a two-year high on concern that a U.S. slowdown may hurt overseas sales of cars and digital cameras, the central bank's quarterly Tankan business survey showed last week. The likelihood consumer prices will keep falling in coming months will make it harder for the bank to raise rates in the first half of 2007, analysts say.
``The Tankan mirrors Japanese businesses' concern about overseas economies, particularly the U.S.,'' said Akio Makabe, professor of economics at Shinshu University in Nagano, northwest of Tokyo. ``It's highly likely that the Bank of Japan will hold off a next rate hike until around September, when policy makers obtain enough clues about the direction of the U.S. economy.''
The yen traded at 159.71 per euro at 1 p.m. in Tokyo, after falling to a record 159.74 shortly before the decision was announced. Japan's currency was little changed at 119.04 against the dollar compared with 119.03 before the announcement.
Tankan Survey
The bank raised the key rate from near zero last July, its first increase in six years, and doubled it in February. Deputy Governor Toshiro Muto said last week that borrowing costs need to be raised further in line with the economy's expansion.
Of 16 Tokyo-based economists surveyed separately, seven said the bank will probably raise rates in August or September, and five said it will wait until the fourth quarter. Only one predicted an increase as early as July and three said the bank will pause until next year.
The Tankan survey showed a mixed picture of Japan's economy. On the bright side, large manufacturers plan to boost spending by 2.5 percent in the year that began April 1, more than economists expected. Large service companies remained the most optimistic they've been in 15 years and aim to boost investment 3.1 percent.
``Even with U.S. growth decelerating, we expect the Bank of Japan to raise rates in August or September, given the brisk capital investment plans shown in the Tankan,'' said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo. He said demand from Asia is helping to ease the effect of a U.S. slowdown.
Slower U.S. Growth
Growth in the U.S. will slow to 2.1 percent this year from 3.4 percent in 2006, the World Bank predicted in its semi-annual report last week. East Asia, excluding Japan and the Indian subcontinent, will expand 7.3 percent this year, down from 8.1 percent, the Washington-based lender said.
U.S. new home sales fell to the lowest level in almost seven years in February. Subprime borrowers, typically people with limited or poor credit histories, fell behind on their mortgage payments at the highest rate in four years last quarter.
``It's still unclear how the issue of subprime loans will be settled,'' Nobuo Kuroyanagi, chairman of the Japanese Bankers Association and chief executive of Mitsubishi UFJ Financial Group Inc., said last month. ``U.S. growth has a big influence on the global economy, and we're monitoring it very closely.''
Higher borrowing costs in Japan have enabled banks to increase lending rates and boosted their profit since the fourth quarter, Kuroyanagi added.
Deputy Governor Muto said the U.S. economy will probably achieve a soft landing, with growth returning to potential even if it temporarily slows.
Consumer Prices
Japan's core consumer prices, which exclude fresh food, declined 0.1 percent in February from a year earlier, the first drop since last April. Governor Fukui has said prices will stay on a rising trend after hovering near zero in coming months.
``There is very little evidence of the upward pressure on prices that we would normally expect to see at this advanced stage of the economic cycle,'' said Ben Eldred, a Japan strategist at Daiwa Securities Group Inc. in London. ``The chance of a rate rise over summer now appears close to zero.''
Some economists said there's a chance the bank will raise rates before a July Upper House election should the bank become confident that Japan's biggest export market will pick up later in the year. The U.S. economy created 180,000 jobs in March and the unemployment rate dropped to match a five-year low, the Labor Department said last week.
Worst Is Over
``The worst of the downturn is over for the U.S. economy and we can anticipate foreign demand for Japanese exports to gather steam later this year,'' said Hiromichi Shirakawa, a former BOJ official and now chief economist at Credit Suisse in Tokyo. The Bank of Japan may raise rates as early as May or June, he said.
Demand may be picking up at home, too. Spending among Japanese households rose in the first two months of 2007 after declining every month last year. Economic and Fiscal Policy Minister Hiroko Ota told reporters today that consumption is showing ``brighter signs,'' though wages need to increase more.
Post a Comment