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Japan: No clear guidance for next rate hike
Thu, Oct 11 2007, 13:50 GMT
by Flemming J. Nielsen
Bank of Japan (BoJ) as expected left its target O/N rate unchanged at 0.5% in an 8-1 vote. Board member Mizuno was the only dissenting voice and as usual made his point that the target rate should be increased.
In its monthly report, the official BoJ view was largely unchanged. The BoJ view continues to be that Japan’s economy is currently expanding moderately and is expected to continue to expand moderately while the environment for corporate finance remains accommodative. There have only been minor changes made in the statement of the BoJ compared to September. Firstly, in BoJ’s latest statement, the sentence “...production has been flat lately” has been deleted and BoJ just notes that “...production has been on an increasing trend”. This view is based on the strong rebound in industrial production in July and August. Secondly, BoJ has inserted “Business sentiment has remained generally favourable although it has become cautious in some sectors”. Basically this is the main message from the Tankan business survey released by BoJ last week, which showed sentiment remaining very positive among large companies but deteriorating somewhat among small companies.
At the press briefing, BoJ governor Fukui turned slightly more hawkish. He stressed that the international environment remains the single biggest uncertainty. However, Fukui noted "...The impact of sub-prime turmoil in the US on global growth has been limited" and "...we have seen some improvement in financial markets but some uncertainties remain." On inflation Fukui was slightly more hawkish too. According to Fukui upward pressure on prices is gradually increasing and although the price index is barely moving the public’s price expectations are changing. But importantly, Fukui continues to downplay the importance of consumer prices for the timing of the next BoJ rate hike.
Although there is no clear guidance on the timing of the next BoJ rate hike in particular Fukui’s press briefing indicates that the likelihood of a BoJ rate hike is increasing. We still believe a rate hike is possible as early as December based on continued stabilisation on financial markets and not the least on the recent weakness of JPY. Market reactions on today’s rate decision have been modest.
Published on Thu, Oct 11 2007, 13:53 GMT
Danske Bank
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