Monday, July 03, 2006

BOJ may raise rates.

Bank of Japan May Raise Interest Rates Next Week, First Time in Six Years
July 4 (Bloomberg) -- The Bank of Japan will probably raise interest rates for the first time in almost six years next week after a report indicated companies plan to increase spending at the fastest pace in 16 years, a survey showed.

Governor Toshihiko Fukui and his policy-board colleagues are likely to increase the benchmark overnight call rate from near zero at the end of a two-day meeting on July 14, according to nine of 15 economists surveyed by Bloomberg News.

Fukui said last month his board will raise rates ``without delay'' should investment become excessive. Ending the zero-rate policy will give the bank tools to manage the pace of growth in an economy that is headed for its longest postwar expansion.

``The Tankan survey confirms the strength of the economy and backs up the case for a July rate increase,'' said Taro Saito, a senior economist at NLI Research Institute in Tokyo. ``The report is evidence that capital spending could start to become excessive.''

Japan's largest companies plan to increase spending 11.6 percent this year, the most since the year ended March 1991, when companies boosted investment 18.4 percent, the Bank of Japan's quarterly Tankan survey showed yesterday. The benchmark 10-year bond yield rose to 1.965 yesterday, the highest since yields touched 2 percent on May 16.

The Bank of Japan would join the U.S. Federal Reserve and the European Central Bank in raising rates as faster global economic growth and near-record oil prices stoke inflation. The Fed raised its benchmark rate a 17th straight time to 5.25 percent on June 29. The ECB may signal further increases in its key rate, now at 2.75 percent, when policy makers meet on July 6.

Government Opposition

Government opposition may prove to be an obstacle to a July increase, said Yasunari Ueno, chief market economist at Mizuho Securities Co. Prime Minister Junichiro Koizumi yesterday said the central bank should carefully assess the economy and help overcome deflation before raising borrowing costs. Chief Cabinet Secretary Shinzo Abe urged the bank to keep rates near zero to support the economy.

``We want the Bank of Japan to continue its zero-rate policy for some time,'' Abe told reporters in Tokyo yesterday.

The government asked the central bank to delay its decision in August 2000 to raise rates, allowing it to blame the bank when the economy slipped into recession three months later.

``It's natural to expect the government to exercise its right to object,'' said Ueno. ``The Bank of Japan will want to avoid a repeat of the nightmare of 2000, which would make it difficult to raise rates in July.''

Murakami Investment

Officials from the Ministry of Finance and Cabinet Office attend monetary policy meetings to express their views, without having the right to vote. Expectations for higher rates have pushed up yields in the world's largest sovereign bond market, forcing the government to pay more to fund its 749 trillion yen of debt.

The government's bargaining power was strengthened after Fukui's acknowledgment last month that he invested in a fund created by Yoshiaki Murakami, who was indicted for insider trading on June 23. Koizumi and other key policy makers said Fukui shouldn't resign over the investment, which he made in 1999 when he worked for a private research institute.

Fukui is scheduled to speak to central bank managers on July 6 in Tokyo, which will be his first formal opportunity to discuss the Tankan data.

Rising profits are prompting companies including Toyota Motor Corp. to increase spending and raise wages, ending seven years of deflation. A report last week showed that core consumer prices, which exclude fresh food and are the bank's preferred measure of inflation, rose at the fastest pace in eight years.

Reports on machinery orders -- a key indicator of future capital spending -- bank lending and producer prices are also due before the bank meets.

``A delay to the end of the zero-rate policy could be perceived as the bank caving into political pressure and would reflect unfavorably on the bank,'' said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo.


Anonymous Anonymous said...

Good post.


3:40 PM  

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