Japan: BoJ is still in some denial

Tue, Nov 13 2007, 15:52 GMT
by Flemming J. Nielsen

Danske Bank A/S


As expected, Bank of Japan (BoJ) left its leading O/N target rate unchanged at 0.5% in an 8-1 split decision. As usual board member, Mizuno, was the dissenting voice arguing for a rate hike. In its monthly economic report the official BoJ views remains that the Japanese economy is “expanding moderately.” At the press briefing following today’s monetary meeting, board governor Fukui’s tone was largely unchanged compared to last month. Fukui still sees considerable downside risk to the international economy. However Fukui continues to downplay the downside risk to the domestic economy, referring to today’s release of stronger than expected Q3 GDP figures.

Even though headline Q3 GDP figures were stronger than expected the main message in our opinion is that domestic demand has decelerated and the Japanese growth yet again is being driven mainly by exports. Hence, the Japanese economy is very vulnerable to slower growth globally. It appears that at least officially, the BoJ continues to be in a state of denial about the domestic Japanese economy. However, we believe the BoJ could soon start to soften its tone further as Q4 turns out to be weaker.

Impact: This was in line with market expectations: with marginally weaker JPY and interest rates largely unchanged. The next rate hike is expected in late Q2 08 depending on stabilisation of international financial markets and recovery in domestic demand in Japan in Q1 08. This is currently discounted by about 50% probability by the markets: we still expect another rate hike in late 2008. As seen from 3M (see chart below) this view is more hawkish than current market expectations.

Published on  Tue, Nov 13 2007, 15:54 GMT

Danske Bank  | Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/ | danskeresearch@danskebank.com

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