Bank of Japan keeps overnight call rate target unchanged by majority vote UPDATE

Bank of Japan keeps overnight call rate target unchanged by majority vote UPDATE

	Published : Thu, 18 Jan 2007 06:26 By : Agencies Print this Story

TOKYO (XFN-ASIA) - The Bank of Japan's policy board has voted to keep the overnight call rate target unchanged at 0.25 pct, the central bank said.

The move was widely expected by the market.

The BoJ said the vote to keep the key rate unchanged was 6-3. This was the first time in 12 meetings that the nine members of the policy board had not been unanimous in their voting.

The central bank has kept the minimum lending rate for commercial banks at the present rate since July, when it raised it from near zero, the first rise in nearly six years.

The policy board decided to leave the Lombard rate, at which it lends direct to commercial banks, at 0.4 pct.

To curtail any spikes in long-term interest rates, the central bank said it will continue its monthly purchases of 1.2 trln yen worth of long-term government bonds.

The BoJ's policy board will hold its next meeting on Feb 20-21.

Economists said the central bank's latest decision was no surprise, coming as it did amid mounting pressure from the government and from politicians and given Japan's tame inflation and weak consumer spending.

Earlier this week, Economic and Fiscal Policy Minister Hiroko Ota had urged the BoJ to keep its super-low interest rates, arguing that Japan was 'facing an extremely critical moment as it is finally getting out of deflation.'

Hidenao Nakagawa, secretary general of the governing Liberal Democratic Party, made the same call but accompanied that with a threat to amend the BoJ law -- which would take away the BoJ's independence from the government -- if the central bank did not conform with government policy.

According to Nakagawa, if the BoJ 'cannot unify its judgment on the economy and policy targets to conform to those of the government, it will represent a major flaw in the legal system.'

'All of a sudden, the BoJ apparently bowed to the mounting pressure from the politicians and the government,' JP Morgan Securities chief economist Masaaki Kanno said.

'This means that market participants will now have to pay more attention to comments from politicians going forward,' he added.

Investors were keenly awaiting BoJ governor Toshihiko Fukui's news conference at 3.30 pm (0630 GMT) to look for clues on whether the central bank will hike rates this year and the likely timeline for such a hike.

From an accountability point of view, Mizuho Securities chief market economist Yasunari Ueno has said 'deferring a rate hike in January was a reasonable decision.'

'Because the BoJ postponed a rate hike in December by acknowledging some weakness in private consumption and prices, the BoJ should first confirm a turnaround in these parameters before it makes a move,' Ueno had said prior to the rate decision announcement.

November core CPI had risen 0.2 pct from a year earlier, up slightly from a marginal 0.1 pct increase in the previous month, while household spending in the month fell 0.7 pct in real terms from a year earlier to an average 282,860 yen, declining for the 11th straight month.

In assessing whether there will be a rate hike in February, economists are looking to the release of real GDP data for the three months to December due out mid-February.

NLI Research Institute senior economist Taro Saito said that should the December quarter GDP data confirm a strong rebound in private consumption, the BoJ is likely to go for a rate hike at its next policy board meeting on Feb 20-21.

But Mizuho Securities' Ueno thinks the possibility of a February hike is extremely low. For him, that possibility is not going to emerge until well after the start of the next fiscal year, which begins in April.

Some economists are also assessing whether the recent sharp drop in oil prices could impact the prospects for a rate hike, as any rate call normally considers the trend in prices.

Oil prices have slumped to 19-month lows near 51 usd a barrel after OPEC leader Saudi Arabia was reported as saying there may be no need for further production cuts.

'Growing downward pressure on core CPI, resulting from a fall in energy prices, is a negative factor for a rate hike. The BoJ will need to demonstrate convincingly why a rate hike is needed when the inflation rate is low,' JP Morgan's Kanno said.

He said that if the WTI (West Texas Intermediate) price of oil remains at the 50 usd per barrel level, the year-on-year change in the core CPI will be zero to 0.2 pct in coming months.

(1 usd = 120.61 yen)

yasuhiko.seki@xfn.com