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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (39584)	2/10/2000 9:22:00 AM
From: Les H	Respond to of 99985

A year on, BOJ seen holding rates at zero to 2001 By William Mallard TOKYO, Feb 10 (Reuters) - The Bank of Japan's Policy Board marks an anniversary unique in the annals of central banking as they meet on Thursday -- the day they drove interest rates to zero. But even with the BOJ under pressure to take radical steps to ease credit even further, a consensus has emerged among central bank-watchers that the board may well still be holding their zero interest rate policy intact when they meet this time next year. The BOJ is clearly uncomfortable with the policy, which Governor Masaru Hayami grumbles is abnormal. The bank has subtly begun preparing the market for a nudge upwards of short-term rates up when conditions warrant. With the government saying the economy is set to dip back into technical recession with a second quarter of contraction, any swift change is on the shelf. ``What central bank in its right mind would think about raising rates?' said Russell Jones, chief economist at Lehman Brothers in Tokyo. 'BOJ LAYS GROUNDWORK THIS YEAR, HIKE IN 2001' Economists and former BOJ officials see no clear end to the threat of deflation, meaning the BOJ cannot even start considering a rate hike until mid-year at the earliest. Most BOJ-watchers see no change this year. ``For the BOJ, this is the year of laying the groundwork for lifting the zero interest rate policy,' said chief economist Akio Makabe at Dai-Ichi Kangyo Research Institute. ``Next year is the year they achieve it.' Japan remains vulnerable to shocks such as a Wall Street crash, and the debt-swamped government is reaching the limits of its ability to spur the economy with deficit spending, said former BOJ executive director Tatsuya Tamura. ``Given this background, it will be difficult for the BOJ to end its zero interest rate policy within this year,' Tamura told Reuters. Moreover, the BOJ remains under intense domestic and international pressure to maintain, or even further ease, policy to bolster the economy and fight deflation. A ruling party panel is studying the idea of a positive inflation target, while some lawmakers call for the BOJ to buy government debt or otherwise pump up the money supply. A survey in the Nikkei Financial Daily this week found 12 of 20 prominent BOJ-watchers forecasting the bank would not tighten policy this year and half seeing no change before April 2001. Four of the respondents thought the BOJ could change policy in the fourth quarter of this year, but three see the bank on hold until at least 2002. EMERGENCY OVER, BUT ECONOMY STILL FRAGILE When the Policy Board decided a year ago on Sunday to cut its already unprecedentedly low 0.25 percent overnight target rate to stave off deflation, the BOJ, unsure exactly what would happen, announced it was guiding the rate ``as low as possible.' It soon succeeded in bringing the overnight rate to zero, after subtracting money brokers' commissions, and added the term ``zero interest rate policy' to the central bank lexicon. After that, the economy roared back from its worst postwar downturn with two quarters of powerful growth, sentiment has improved and Tokyo shares are now near 30-month highs with the yen at five-month lows. Time to lift the state of emergency, declares the Policy Board's most hawkish member, Eiko Shinotsuka. She opposed last year's easing and has repeatedly urged the board to raise the overnight rate target back to 0.25 percent, only to have her proposals rejected by her peers. Even Shinotsuka says the bank must not shock the markets by tightening aggressively. The BOJ should gently walk the markets through the undoubtedly nervy process of ending a string of credit easings that began in 1991, she said. STEADY PRICES, RISING MARKET RATES NEEDED FOR BOJ HIKE What, then, would be the conditions needed for a rate hike? The bank refuses to be pinned down, shunning any numerical targets and saying only that it will keep rates at zero ``until the prospect is in sight for an end to deflation concerns.' BOJ watchers offer such benchmarks as: a clear bottoming in prices, recovery in corporate profits, shrinking of excess capacity and employment, a Nikkei stock average over 20,000 and 10-year Japanese government bond yields over three percent. The Nikkei was trading around 19,800 on Thursday morning, with the 10-yr bond yield at 1.85 percent. Before the BOJ raises the overnight target, some analysts suggest, it may prepare the markets by gradually draining some of the mammoth one trillion yen surplus it now leaves sloshing around the short-term money market every day. It could reduce excess reserves by half while still keeping overnight rates at zero, but clearly signalling that the party was coming to an end.