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Japan: No surprise in BoJ minutes but soft Muto comments overnight

Fri, Nov 16 2007, 09:46 GMT
by Flemming J. Nielsen

Danske Bank A/S

No major surprises in the minutes from 10-11 October monetary meeting of the Bank of Japan (BoJ). The official line continues to be that the Japanese economy is currently doing OK and eventually BoJ will have to hike rates. However, BoJ recognises that significant downside risks exist due to the US housing market and turmoil on international financial markets and is clearly in no hurry to hike rates.

Central paragraphs from the minutes:

“...on the current state of Japan’s economy members concurred that it continued to expand moderately, and was likely to continue its sustained expansion with a virtuous circle of growth in production, income and spending in place. They also agreed however, that developments in global financial markets and the global economy re-mained unstable on the whole, albeit with some improvement...”

“ ...indicators of consumer sentiment has generally been at favourable levels, although some had shown a slight deterioration most recently. Private consumption was expected to follow a gradual uptrend, reflecting the gradual increase in household income”

“....based on the discussion, members agreed that close attention should continue to be paid to developments in global financial markets, and how they might affect economic activity.”

Deputy Board Governor Muto (likely future Board Governor when Fukui resigns in March next year) made some softer comments overnight. While still sticking to the official line he emphasised that uncertainty was currently making it very difficult to reach monetary decisions and to some degree he admitted the current domestic weakness too could contribute to delaying a rate hike. Muto said, that “...the issue of housing investment is clouding our outlook” However, he maintains a clear tightening bias by saying an interest rate hike is more likely than a rate reduction.

We do believe that BoJ in its official line overestimates the strength of the domestic Japanese economy based on the recent sharp drop in employment growth and the decline in consumer confidence. We expect growth to slow in Q4 mainly because of weaker private consumption and the continued plunge in residential investments. Hence, we expect BoJ to turn even softer in coming months.

Impact: Rates on hold for the foreseeable future. We expect the next rate hike in late Q2 08. Only Marginal lower rates as the market is already aggressively priced for one rate hike in 08. In isolation weaker JPY but the market today is dominated by increased risk aversion

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Published on  Fri, Nov 16 2007, 09:47 GMT