Bank of Japan may say no this week to an interest rate increase
TOKYO: Toshihiko Fukui, governor of the Bank of Japan, may say no this week to an interest rate increase. It will not be his last word on the subject.
Even before the market turmoil of last week, capped by the U.S. Federal Reserves surprise move Friday to lower the interest rate it charges on loans to banks, investors were betting that Bank of Japan policy makers would forgo an increase at their meeting Wednesday and Thursday.
Still, Fukui, who is 71 and whose term ends in March, remains determined to secure his legacy of “normalizing” monetary policy by raising the lowest borrowing costs in the industrialized world.
“If Fukui cant raise rates from 0.5 percent by March, he would probably feel that he didnt do what he set out to do,” said Masaaki Kanno, a former central bank official who is now chief economist at JPMorgan Securities Japan.
Resuming rate increases in Japan would put Fukui at odds with the International Monetary Fund and the government of Prime Minister Shinzo Abe. They cite Japans renewed struggle with deflation - including five months of falling prices - as reason to keep the banks benchmark rate steady.
In addition, Abes governing Liberal Democratic Party, which was routed in upper-house parliamentary elections last month, is eager to avoid further unsettling voters and weakening its already tenuous grip on power.
The partys secretary general, Hidenao Nakagawa, told Fukui at a meeting Aug. 7 that higher interest rates had hurt regional economies and contributed to the party defeat, according to Hiroko Ota, the minister for economic and fiscal policy.
Of greater concern to Fukui is the danger that leaving borrowing costs abnormally low would fuel risky investments leading to asset bubbles, while depriving his successor of maneuvering room in case the Japanese economy stalls.
The same global market turmoil that has taken off the table the possibility of a rate increase in August reinforces Fukuis point that abnormally low rates in Japan encourage unsafe investment.
“He is concerned that if they stay so low for long, there will be the risk of resource misallocation,” said Kanno, the former central bank official.
The credit crunch that set off a global sell-off of stocks this month also drove the yen to its highest level against the dollar in more than a year. The market turmoil prompted investors to sell risky investments financed by so-called carry trades - investments paid for with low-interest loans in Japan.
As markets gyrated, major central banks, including Japans, injected billions of dollars into the banking system, followed by the Feds discount-rate cut Friday. The yen fell on speculation that the Feds action might encourage investors to resume carry trades.
While bringing the Japanese target rate closer to 1 percent would still leave borrowing costs among the worlds lowest, it would allow Fukui to leave his successor some leeway to loosen credit, if necessary.
That is a luxury he did not have when he took office in 2003. Under Fukuis predecessor, Masaru Hayami, the bank pushed the benchmark rate nearly to zero in 2001 as global growth faltered. Japan fell into a recession. Consumer prices, which had been dropping since 1999, declined for three more years.
A rate increase would be the third since Fukui embarked in July 2006 on a strategy of “gradually” raising borrowing costs. He has argued that the bank has room to raise rates now, given sustained growth and the outlook for rising prices.
“Fukui may very well achieve a positive place in history as the BOJ governor who successfully oversaw a cautious return to an interest-rate-driven monetary policy,” said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong.
The latest economic data do not make that effort any easier.
The cabinet office forecast this month that the broadest measure of Japanese consumer prices would be unchanged in the year ending March 31, 2008, down from its January projection of an increase of 0.2 percent.
Ota said the figures meant that the end of Japanese deflation “has been delayed.”
Economic growth slowed in the second quarter more than economists had predicted, falling to a 0.5 percent annualized rate from 3.2 percent in the first quarter.
The International Monetary Fund further complicated Fukuis task this month when it said that the central bank need not rush to tighten credit because inflation was not a threat and Japanese interest rates were at “appropriate” levels.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said, “The IMF seems to be siding with the Japanese government over the BOJ.”
