Japan's central bank Keeps Rate at 0.5% as Consumer Prices May Decline

Japan's central bank kept interest rates unchanged as consumer prices threaten to drop, making it hard to justify a second consecutive increase.

Governor Toshihiko Fukui and his policy board voted unanimously to keep the key overnight lending rate at 0.5 percent, the lowest among major economies, the Bank of Japan said in a statement today in Tokyo. The bank doubled the rate last month.

``The Bank of Japan probably wants to monitor the effect of the February rate hike,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities Japan Ltd. in Tokyo.

Political pressure ahead of an election in July will also make it difficult for the bank to tighten credit until the last quarter of 2007, Yamazaki said. Business confidence in Japan probably fell from the highest in two years amid concern the U.S. economy may slow, the bank's Tankan survey may show next month.

The yen traded at 117.85 per dollar at 1:05 p.m. in Tokyo compared with 117.87 immediately before the announcement. The yield on Japan's 10-year bond was unchanged at 1.575 percent.

Today's decision was predicted by all 49 economists surveyed by Bloomberg News. Fukui said after last month's meeting that the board has no plans to raise rates consecutively.

A global stock slump and concern that economic growth in the U.S. may slow could impede the central bank from acting. When policy makers raised rates last month they said the economic outlook for the U.S. was improving.

``This now looks a little too sanguine,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. Japan's economy ``remains vulnerable to exogenous shocks.''

Tankan Survey

Stocks in the U.S., Japan's biggest export market, slid last week as growing mortgage defaults heightened concern the country's home-loan crisis is spreading.

Confidence among Japan's largest manufacturers probably declined to 24 in March from a two-year high of 25 in December on concern a slowdown in the U.S. may crimp exports, according to the median estimate of 16 economists surveyed by Bloomberg News. A positive number means optimists outnumber pessimists. The central bank will publish the Tankan report on April 2.

The Bank of Japan said last month that it raised the rate because low borrowing costs could spur wasteful investment and asset bubbles. Rates need to be increased gradually, it said. Fukui said the 0.5 percent rate is still ``very low'' given the country's economic growth.

The U.S. Federal Reserve's benchmark rate is 5.25 percent and the European Central Bank's is 3.75 percent, encouraging investors to borrow yen to buy higher-yielding assets overseas.

Yen's Rise

The yen has risen more than 2 percent since the Feb. 21 rate increase, partly after a stock-market rout between Feb. 27 and March 5 erased $3.3 trillion in world market value and prompted investors to sell risky assets and repay yen loans. Japan's benchmark Nikkei 225 Stock Average has declined more than 5 percent since the slump began.

Japan's core consumer prices, which exclude fresh food, were unchanged in January from a year earlier. They may turn negative in February, dragged lower by a drop in fuel costs, according to Takehiro Sato, chief economist at Morgan Stanley in Tokyo.

Fukui has said core prices will keep expanding in the long run even after cheaper oil causes them to slide temporarily.

The bank will probably cut its price forecast for the year starting next month to 0.2 percent from 0.5 percent, said Masaaki Kanno, a former central bank official who's now chief economist at JPMorgan Securities Japan Co.

``Core prices will probably hover around zero or minus in coming months,'' Kanno said.

Faster Growth

The world's second-largest economy grew 5.5 percent in the three months ended Dec. 31, the fastest pace in three years, the government said last week. Business investment led the expansion, climbing 3.1 percent.

Consumer spending rose 1 percent, barely offsetting a 1.1 percent decline in the previous three months. Wages fell at the fastest pace in more than two years in January and the ratio of jobs to applicants fell to 1.06, an eight-month low.

A round of wage increases announced by Japanese companies including Toyota Motor Corp. and Matsushita Electric Industrial Co. on March 14 may do little to spur consumption, the missing ingredient for accelerating growth, economists said.

``Consumption remains incapable of becoming a locomotive for economic growth, and behind that is a slump in wages,'' said Jun Ishii, chief fixed income strategist at Mitsubishi UFJ Securities Co., who predicts the bank will next raise rates in October. ``The improvement of the corporate sector is failing to benefit households.''

The bank will release its monthly economic assessment at 3 p.m. and Fukui will speak at a press conference at 3:30 p.m. Minutes of the two-day meeting will be published on May 7.

source:www.bloomberg.com