Bank of Japan Won't Rule Out Rate Increase This Year (Update6)
By Mayumi Otsuma
Oct. 13 (Bloomberg) -- Bank of Japan Governor Toshihiko Fukui unexpectedly raised the prospect of a second interest-rate increase this year as the economy heads for its longest expansion since World War II.
``I cannot rule out the possibility'' of another rate increase before the end of the year, Fukui said at a press conference in Tokyo after the bank left its overnight lending rate at 0.25 percent. The bank will adjust interest rates gradually and carefully as long as the economy and prices evolve as expected, which is ``highly likely,'' he said.
Fukui's comments underscore the bank's determination to prevent the lowest borrowing costs among industrial nations from fueling an investment bubble. The bank raised interest rates for the first time in almost six years in July after ending a policy of fighting deflation in the world's second-largest economy.
``Fukui's trying to tell the market, don't write off anything,'' said Wong Keng Siong, senior economist at DBS Bank Ltd. in Singapore. ``The Bank of Japan may be trying to hint to the market they're looking to move earlier rather than later.''
The yield on December Euroyen futures contract rose to 0.555 percent from 0.51 percent three weeks ago, indicating that traders are increasing bets the central bank will raise borrowing costs by December.
Interest rates may be pushed higher in the U.S. and the economies of Europe as well as Japan. Federal Reserve Bank of Chicago President Michael Moskow said yesterday that more rate increases may be needed to curb inflation. The Fed's benchmark rate is 5.25 percent.
Abe's Government
The ECB is also ready to tighten credit if its forecasts for economic growth and inflation are confirmed, the bank said in its monthly report yesterday. The ECB last week raised its key rate to 3.25 percent.
Japan's new government, formed last month by Prime Minister Shinzo Abe, will probably oppose a hasty rate increase, said Mamoru Yamazaki, chief Japan economist at RBS Securities Japan Ltd. in Tokyo.
Abe, who faces an upper house election in July 2007, pledged to sustain growth and rely on revenue rather than tax increases to reduce the world's largest public debt. Low interest rates will be needed to shore up growth.
Finance Minister Koji Omi said today he wants the central bank to support the economy with its policy.
``The Bank of Japan will definitely get opposition from Abe's government if it attempts to raise rates by the end of the year,'' said Yamazaki. ``The bank needs to collect more convincing data to support a rate increase decision before taking action.''
Economic Outlook
Speculation for an interest-rate increase this year waned last month after a revision to the consumer price index showed inflation was lower than expected and amid signs that the U.S. economy may be slowing. Benchmark 10-year bond yields fell as low as 1.6 percent on Sept. 1, the lowest since March 9. The yield rose 3 basis points to 1.775 percent today.
The central bank will publish its semi-annual estimates for the economy and prices on Oct. 31.
``We will closely examine economic and price data and make an appropriate decision at each board meeting,'' Fukui said.
In April the bank forecast the economy would expand 2.4 percent in the year ending March 31 and 2 percent the following fiscal year. Core consumer prices, which exclude fresh food and are the bank's preferred inflationary gauge, would rise 0.6 percent this fiscal year and 0.8 percent next year, it said.
U.S. Growth
``The central bank's projection for growth probably won't be altered much, but the forecast for consumer prices will be lowered'' because of a revision to the method for calculating inflation, said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting in Tokyo.
Core consumer prices rose 0.3 percent in August, the month the government reshuffled the basket of goods it used to calculate the price changes. The revision pushed down core price gains by about 0.5 percentage point.
An index of prices that companies pay for energy and raw materials such as iron ore surged 3.6 percent from a year earlier, the most in 25 years, the bank said in a separate report today. A 24 percent drop in oil prices since mid-July may slow the pace of producer price increases.
The latest indicators show the U.S. economy may be stronger than expected. The U.S. trade deficit unexpectedly widened to a record $69.9 billion in August on a jump in imports of computers and consumer goods, the Commerce Department said yesterday.
In any case, Fukui said today that the slowdown that pushed U.S. economic growth to 2.6 percent in the second quarter from 5.6 percent in the first, had had little effect on Japan's exports. Japan's export volumes grew to a record in August, according to data compiled by the Bank of Japan.
Timing
``The Bank of Japan will make a decision based on indicators for the domestic economy rather than the trend in the U.S.,'' said Takuji Aida, chief Japan economist at Barclays Capital in Tokyo. Aida predicts the bank will raise rates in February.
Only three of 16 economists surveyed by Bloomberg News between Oct. 3 and 10 expect the bank to raise the overnight lending rate by the end of this year.
Six economists said rates will increase in the first quarter of 2007, the survey showed. One said a rate increase will come in the second quarter of next year and another said it'll occur in the third quarter. Five said the bank will wait at least until next October.
The world's second-largest economy is in its 57th month of growth, equaling the so-called Izanagi boom of 1965-1970.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net |
