Muto Says BOJ to Raise Rates Based on Economy, Prices

The Bank of Japan remains committed to increasing interest rates gradually as the economy extends its expansion and prices rise, Deputy Governor Toshiro Muto said.

``The pace of needed interest-rate adjustments will be determined based on improvements in the economy and price situation,'' Muto said today in a speech in Matsue, western Japan. ``We don't have any predetermined schedule.''

Governor Toshihiko Fukui said last week that the bank must become more confident about the economy and prices before raising borrowing costs, spurring speculation he'll refrain from proposing a rate increase next month. Muto said assumptions that the bank will raise rates at set intervals should be avoided.

``Muto today endorsed expectations that there will be no rate hike in July,'' said Masafumi Yamamoto, currency economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan currency trader. ``If the BOJ had some complaints about the market's impression, Muto would have corrected them.''

The yield on the benchmark 10-year bond dropped 3 basis points to 1.89 percent as of 4:35 p.m. in Tokyo. Yields have fallen from 1.985 percent on June 13, the highest in 11 months.

Muto's comments on interest-rate policy echoed those of board members at their May 16-17 meeting, according to minutes published today. The members said rates should be raised gradually in line with developments in the economy and prices.

No Change in Tone

``There's no real reason for the BOJ to change its tone of language given that the market has already completely factored in an August rate increase,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo, who isn't related to the deputy governor.

Central bank policy makers won't comment on investors' speculation about the timing of rate increases, such as the probability calculated based on the trading of financial instruments, the deputy governor said at a news conference.

He said the bank's review of its twice-yearly economic outlook has no bearing on the timing of rate increases, though the two could coincide. The next review is scheduled to take place in July.

Governor Fukui said on June 15 that all nine board members agreed on the need to be more certain that spending by Japan's consumers and companies can sustain growth before raising rates.

Manufacturers said they were pessimistic in the second quarter, a government survey showed today, signaling their concern that overseas demand may stall. Sentiment fell to minus 2.2 points this quarter from 0.1 point in the previous three months. A negative number means pessimists outnumber optimists.

Tankan Survey

The bank will raise the key overnight lending rate to 0.75 percent in August as long as its quarterly Tankan business confidence survey and second-quarter economic growth are solid, according to 11 of 17 economists surveyed by Bloomberg News.

Today's survey probably overstates pessimism and next month's Tankan could ``remain quite strong,'' said Amy Auster, head of international economics at Australia & New Zealand Banking Group Ltd.

Muto, 63, who is most likely to become governor when Fukui's five-year term expires next March, said the bank is closely watching the currency market. Japan's low interest rates are encouraging investors to buy higher-yielding assets overseas, weakening the yen.

``Drastic moves in foreign-exchange rates may disrupt financial markets, so stability in the currency market is desirable,'' he said. ``It's appropriate that currency levels are determined by financial markets, reflecting the strength of the Japanese economy and other countries.''

Consumer Prices

The yen traded at 165.39 per euro at 4:35 p.m. in Tokyo, a day after dropping to a record low of 166.12. It was 123.27 per dollar from 123.36 late yesterday.

Gains in consumer prices excluding fresh food will gradually accelerate over the long term and wages will rise as the job market becomes tighter, Muto said. Core consumer prices fell 0.1 percent in April, a third monthly drop.

Muto ``hasn't deviated very far from the official language of the Bank of Japan,'' said Auster. ``He's coming under increased scrutiny because he is probably the favored candidate for the BOJ governor next year.''

The U.S. economy will probably achieve a soft landing and growth in other regions will make up for its slowdown, Muto said.

Still, a prolonged adjustment of the U.S. housing market and slowing business investment pose a risk, he said. Home starts fell for the first time in four months in May as interest rates rose, the Commerce Department said yesterday, suggesting the worst housing recession in 16 years will persist.

source:www.bloomberg.com