Bank of Japan keeps interest rate unchanged

TOKYO: The Bank of Japan voted 8-1 to keep its benchmark interest rate unchanged as it waits for more proof that economic growth will be sustained and inflation will take hold. Board member Atsushi Mizuno opposed the decision.

Governor Toshihiko Fukui and his policy board colleagues held the key overnight lending rate at 0.5% at a two-day meeting that ended on Thursday, the central bank said in Tokyo.

Policymakers are confident in their outlook for the economy, though they want to examine more data before increasing borrowing costs, Fukui said. The Bank of Japan will probably raise the key rate, the lowest among major economies, next month, according to economists and investors.

“Fukui’s commitment to raising interest rates will remain firm,” said Yasunari Ueno, chief market economist at Mizuho Securities Japan. “Any proposals for a rate hike support expectations of an August move.” The yen traded at 122.01 per dollar in the evening in Tokyo. The yield on Japan’s 10-year bond rose 2 basis points to 1.9%.

“There’s no change in our expectations that the economy will continue this lasting growth,” Fukui said at a news briefing. Second-quarter gross domestic product may be a “bit weaker than the first quarter,” though that won’t determine the outcome of the August policy meeting, he said.

By waiting one more month, the Bank of Japan’s policymakers are able to check a report on second-quarter gross domestic product to be published in mid-August, as well as monthly data on consumer prices and industrial output. Production fell for a third month in May and consumer prices excluding fresh food slipped 0.1%, a fourth monthly drop. They also avoid any charges of a rate increase distracting from an Upper House election on July 29.

“The pretext for putting off a rate hike is that the certainty about the sustainability of economic growth has not increased,” said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. “However, the true reason could be that the BoJ wants to avoid paying unnecessary political cost” before the election.

Mizuno was one of three policymakers who unsuccessfully proposed a rate increase in January, a month before the central bank doubled the key rate to 0.5%. The absence of other dissenters on Thursday makes it difficult to conclude that an August rate increase will occur.

“The 8-1 vote gave about the weakest lead possible in terms of the timing of the next rate hike,” said Richard Jerram, chief Japan economist at Macquarie Securities in Tokyo. “A unanimous vote would have dampened expectations of an August rate hike. Conversely, two or three dissenters would have been taken as a repeat of the
January meeting.”

Investors see a 69% chance of an August rate increase, according to Credit Suisse Group calculations based on the exchange of interest payments.

Policymakers said in the bank’s mid-term review of its half-yearly economic outlook that the economy and prices are largely improving in line with their April forecast.

The world’s second-largest economy will grow 2.1% in the year ending March 31 and the following 12 months, the bank said in April. Core consumer prices will rise 0.1% this fiscal year and 0.5% the year after.

Japan’s GDP probably slowed to an annual rate of 1% in the second quarter from 3.3% in the previous three months as exports and consumption lost momentum, according to the median estimate of economists. The government will release GDP in the week before the bank’s August 22-23 policy meeting.

Slower growth probably won’t deter the bank from raising rates because policymakers will check the trend by averaging GDP data over the most recent three quarters, said Morgan Stanley’s Sato. The economy expanded 5.4% in the final quarter of 2006.

Of 34 economists surveyed by Bloomberg News, 21 said the central bank will raise the key rate to 0.75% in August and eight said it will act in September. Three of the remaining five economists predicted October, one said November and the other said the rate will stay at 0.5% this year.

“Rate increases won’t be impeded unless the economy deteriorates or deflation returns,” said Ryutaro Kono, chief economist at BNP Paribas Securities Japan. “The Bank of Japan will probably keep raising rates every six months.”

Interest rates are rising globally. South Korea’s central bank raised its benchmark interest rate to a six-year high of 4.75 percent on Thursday on concern record lending to small companies may spur inflation. The Bank of England lifted its key rate for a fifth time since August last week.