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To: John Vosilla who wrote (55876)	3/13/2006 3:03:35 PM
From: Crimson Ghost	Respond to of 110194

BOJ's Mizuno Warns Against Prolonged Zero Rates (Update3) March 13 (Bloomberg) -- Expectations that the Bank of Japan will keep interest rates near zero percent for a long time may hurt the nation's economy, said Atsushi Mizuno, a central bank policy maker. ``If expectations for prolonged zero rates grow excessively, that may stimulate demand too much, cause a swing in economic activity and force the central bank to make drastic policy changes,'' Mizuno said in a speech at a meeting with business executives in Otsu City, western Japan. The Bank of Japan last week changed its five-year deflation-fighting policy, signaling more than seven years of price declines are almost beaten, and said it would keep benchmark interest rates near zero percent for some time. Keeping rates low for too long may crease asset bubbles, Mizuno said. ``The Bank of Japan is concerned that real interest rates are too low and that certain asset prices may rise faster than expected,'' said Toru Umemoto, chief currency analyst at Barclays Bank Plc in Tokyo. ``Statements like this raise a greater likelihood of a rate hike in September or October rather than waiting until November or December.'' Real interest rates turn negative when nominal rates are below the increase in core consumer prices, which climbed 0.5 percent in January. `Safety Margin' ``We would expect the Bank of Japan to end its zero interest rate policy and raise rates by 25 basis points'' if the core consumer price index continues climbing, Barclays Capital said in a note after Mizuno's speech. Mizuno said the bank should be careful how much it allows real interest rates to fall to prevent stimulating the economy too much. The bank should aim to have a ``safety-margin'' level of interest rates that it can then lower to respond to a possible slowdown in the economy in the future, he added. One problem the bank may have in raising rates to control certain asset price increases while consumer price gains remain moderate may be the potential reaction from financial markets and the government, he said. The government is concerned raising interest rates may drive up bond yields, increasing interest payments on public debt, which at 150 percent of the economy, is the biggest in the industrialized world. Economic Expansion Japan's economic expansion in recent quarters, combined with stock price gains, suggests the potential economic growth rate is between 1.5 percent and 2 percent, up from about 1 percent estimated by the bank last October, Mizuno said. That means a neutral interest-rate level that neither stimulates nor inhibits economic growth would be at least 1.5 percent, he said. ``Current interest rates are too low'' given the potential growth rate, he told a press conference after his morning speech. Any rate increases will be made gradually, he said. Mizuno said the zero to 2 percent range of consumer price gains the bank's board members published last week to indicate whether they consider prices are stable isn't a policy target. Mizuno has always opposed adopting an inflation target, he said. Mizuno, who was a Credit Suisse strategist before joining the bank's board in December 2004, had urged the central bank to reduce the reserve target from as much as 35 trillion yen since last April. The bank boosted the target to stem deflation and ensure there were sufficient funds to avert a potential crisis stemming from the increase in bad loans to 43.4 trillion yen in 2001. Financial institutions had written off bad loans last year and didn't need so many funds, Mizuno argued, saying it was important the central bank revive the function of interest rates. Sixteen of 20 economists surveyed by Bloomberg News on March 10 said the bank will probably raise borrowing costs by Dec. 31. To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net