BOJ Waited for Consumption, Price Data, Minutes Show

Most Bank of Japan policy makers decided against raising interest rates last month because they preferred to examine more data on consumption and inflation, minutes of the January board meeting show.

The central bank voted 6-3 to keep the benchmark lending rate at 0.25 percent at the Jan. 17-18 meeting. Members Atsushi Mizuno, Miyako Suda and Tadao Noda opposed the decision, proposing a rate increase to 0.5 percent, according to the minutes, released today in Tokyo.

Most members said ``it was important for the bank to confirm with a high degree of confidence that economic activity and prices would develop in line with its projection, and in the current situation there was time for further examination,'' the minutes show.

The Bank of Japan last week raised the key rate to 0.5 percent based on an 8-1 vote, saying higher borrowing costs would help sustain economic growth. Governor Toshihiko Fukui said his policy board will gradually increase rates in accordance with developments in the economy and prices.

``The next rate increase will probably be a while away, at least until after the July upper house election,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``There won't be any more rate hikes this year because core consumer prices will probably turn negative in coming months and the bank won't be able to take action after that.''

The yen traded at 120.95 per dollar at 2:27 p.m. in Tokyo compared with 120.94 before the minutes were published.

Three Dissenters

Twenty-two of 26 economists surveyed by Bloomberg News last week said the bank will refrain from raising rates again until the third or fourth quarter of 2007, as inflation slows and political pressure mounts before the July election.

At the January meeting, Mizuno said keeping rates on hold could be misinterpreted as approval of further depreciation of the yen, the minutes show. Delaying policy ``normalization'' would make policy actions appear more unpredictable, he said, according to the minutes.

Suda said the bank should take rate action before problems arise because it takes some time for monetary policy to have an effect on the economy. Noda said expectations for prolonging a low-rate policy could cause swings in the economy and prices.

Many board members agreed that the bank's policy decision shouldn't be based on predetermined intervals or a planned schedule, according to the minutes.

Slower Inflation

On consumer prices, many members said the bank should put more focus on the general trend for prices rather than recent data. Core consumer prices, which exclude fresh food, rose 0.1 percent in December, slowing from 0.2 percent in November, as oil costs declined.

Core prices probably failed to rise in January, according to the median estimate of 36 economists surveyed by Bloomberg News. The government will publish its January inflation report on March 2 at 8:30 a.m. in Tokyo.

Fukui has said core prices may contract a little in coming months because of cheaper oil. Still, he said, prices will probably stay on a rising path as the economy expands. Kazumasa Iwata, one of the central bank's two deputy governors, dissented from last week's decision to raise rates. Iwata was more concerned about the outlook for consumer prices than other board members, Fukui said.

Some members at the January meeting said the effective exchange rate between the yen and other currencies was weakening further, making the financial environment more accommodative, the minutes show.

Carry Trade

Even after last week's rate increase, Japan's borrowing costs remain the lowest among major economies, encouraging the yen carry trade, in which investors borrow in the currency to buy higher-yielding assets overseas. Rates at 0.5 percent won't stop the yen from further weakening as investors pursue such trades, Nomura Securities Co. and Bank of America Corp. said last week.

The world's second-largest economy expanded at an annual 4.8 percent pace in the fourth quarter, up from 0.3 percent in the previous three months. Consumer spending, which accounts more than half of the economy, climbed 1.1 percent after dropping at the same rate in the previous period.

Weakness in consumption in the third quarter was probably only temporary, the bank said when it raised rates last week.

Prime Minister Shinzo Abe, whose approval rating has plummeted since he became leader last September, wants to avoid any economic slowdown before the election. Hidenao Nakagawa, secretary-general of the ruling Liberal Democratic Party, said on Feb. 21 that the central bank ``is responsible for explaining its decision to the public and is also responsible for its impact.''

The Cabinet Office, which along with the finance ministry dispatches its officials to the board meetings, issued an extraordinary statement on Feb. 21, saying: ``Now is not the time to make any hasty rate increases because the economy is at a crucial point to overcome deflation and recent data show consumption is weak.''

Government officials attend the central bank's policy meetings without voting.

source:www.bloomberg.com