BoJ keeps rates unchanged to keep govt happy

TOKYO: The Bank of Japan (BoJ) held its benchmark interest rate at 0.25%, averting a clash with government officials who say household spending and inflation are too weak to withstand higher borrowing costs.

The decision was split six-to-three, the bank said today in Tokyo, prompting traders to bet on a February increase. Board members were divided over the outlook for consumer spending, governor Toshihiko Fukui said.

The government calls for restraint this week spurred speculation the bank would wait for the release of fourth-quarter data next month to gauge the strength of consumer prices and spending. Fukui plans to raise rates, the lowest among major economies, to head off a repeat of the 1980s investment bubble that triggered a decade of stagnation. ���The impression that they caved to political pressure is unavoidable,��� said Noriko Hama, professor of economics at Doshisha Business School in Kyoto. ���It���s not a bad decision, given the statistics, but it certainly does not look good for the BoJ,��� he said.

Investors increased bets the bank will raise rates in February to a 69% chance, up from 42% before the decision, according to Credit Suisse Group. Credit Suisse calculates the chances of a quarter-point rate increase based on trading in contracts for the exchange of interest payments. ���Three board members voted against the decision, leaving the possibility that more members may vote for a rate increase next month,��� said Maki Shimizu, an interest-rate strategist in Tokyo at UBS Securities Japan.

The previous six decisions to keep rates on hold were unanimous. The yen fell to 121.28 per dollar from 120.67 late in New York on Wednesday. Tadahiko Nashimoto, director of foreign exchange at Barclays in Tokyo, said the yen may weaken to 125 this month.

The yield on five-year notes climbed 2.5 basis points 1.235% in evening trade in Tokyo. Fukui said the bank didn���t notify the government of its decision in advance. The policy board���s analysis was entirely based on economic and price data, he said.

���Developments in Japan���s economy have so far deviated slightly downward from the outlook made in October,��� the central bank said earlier on Thursday. The economy and prices are still expected to ���develop broadly in line��� with expectations.

Even if core consumer prices were to decline because of falling oil prices, that wouldn���t necessarily diminish the chance of a rate increase, Fukui said. Crude oil prices have dropped 33% since setting a record in July. Core consumer prices, which exclude fresh food, rose 0.2% from a year before in November, up from a 0.1% gain in October.

On Wednesday, bonds rose the most in almost four months after Kyodo News, the Nikkei newspaper and NHK Television said the central bank was likely to keep the rate at 0.25%. That drove bets for a rate increase to a 22% chance from 80% at the start of the week, when media reports said policy makers were leaning toward an increase. Japan���s economy expanded at the slowest pace in almost two years in the third quarter of 2006 as consumer spending dropped 0.9%, the biggest decline in almost a decade, masking growth in corporate investment and exports.

���Consumer spending, which accounts more than half of the economy, probably had a big jump in the fourth quarter,��� Hideo Hayakawa, the central bank���s chief economist, said at an economic forum on January 10.