BoJ meets on interest rates but no change expected

20 Mar, 2007

Bank of Japan policymakers began a two-day meeting on interest rates Monday but no change is expected this month after February's quarter point rise, which was the first since July, economists said.
They said BoJ governor Toshihiko Fukui was likely to reiterate Tuesday his comments from last month that the central bank would continue to raise interest rates only gradually in light of economic developments.
"Since this will be the first meeting after its recent rate hike, we expect it to maintain its present policy without change," predicted Deutsche Bank economists Mikihiro Matsuoka and Seiji Adachi.
Barclays Capital analyst Masuhisa Kobayashi said this week's BoJ meeting was unlikely to attract much attention in the financial markets, adding, "We expect a unanimous decision to leave rates unchanged."
Analysts said that political sensitivities linked to the July elections in Japan's less powerful upper house of parliament may mean that the BoJ's next increase in interest rates will not come before the second half of 2007.
"It will be difficult for the bank to raise rates before the July 22 Upper House election," said Kobayashi. "But we believe it would be a mistake to rule out (altogether) the possibility of a hike in June or July," he added.
The Bank of Japan last month raised its key lending rate from 0.25 percent to 0.50 percent, its first hike since last July when it ended over five years of virtually free credit.
The BoJ has faced political pressure not to raise interest rates too quickly and with inflation still very subdued, the central bank is expected to move cautiously with further monetary tightening.
The Deutsche Bank economists said that the BoJ's monetary tightening was contributing to a drop in global liquidity.
"We believe that the bank's latest tightening (last month) might also hurt Japanese stocks for a brief period," they warned in a research note.
"In this sense, the manner in which the bank's hawkish stance is conveyed to the markets could be an important point in the coming months," they added.

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