Japanese central bankers keep key rate at 0.5 percent

The Bank of Japan kept interest rates on hold at the first meeting after slashing its growth estimate and shelving a two-year policy of seeking higher borrowing costs.

Governor Masaaki Shirakawa and his six colleagues unanimously voted to leave the overnight lending rate at 0.5 percent in the quickest decision in three years, the central bank said in Tokyo. The rate is the lowest among major economies.

The world's second-largest economy is slowing, the central bank said in its monthly report released after the meeting.

"There are no options for the Bank of Japan other than to adopt a policy status quo," said Yasunari Ueno, chief market economist at Mizuho Securities Co in Tokyo. "It won't raise rates until around July next year at the earliest. At the same time, we don't expect a cut."

The yield on Japan's 10-year bond fell 1.5 basis points to 1.645 percent at 3:31 pm in Tokyo. The yen traded at 103.94 per dollar from 104.06 before the announcement. Yesterday's meeting ended at noon, the earliest conclusion since Feb 17, 2005.

"Japan's economic growth is slowing, mainly due to the effects of high energy and materials prices," the central bank said, keeping its assessment of the economy unchanged even after a report last week showed gross domestic product expanded 3.3 percent last quarter, the fastest pace in a year.

"Corporate profits have been leveling off, albeit at a high level, and the pace of increase in fixed investment has become slower," the bank said.

Export growth slows

Exports rose at the slowest pace in almost three years in March. Production fell the most in at least five years.

Machine orders, an indicator of business investment in the next three to six months, also declined, and are forecast to drop this quarter.

Record oil prices and costlier raw materials are squeezing profits and eroding household incomes.

Japanese companies' pretax profits will decline 5 percent in the year ending March 2009, ending a seven-year streak of growth, Shinko Research Institute data showed this week.

Japanese Finance Minister Fukushiro Nukaga said yesterday that rising oil and food prices "are making monetary and macroeconomic policies more difficult".

The Bank of Japan dropped a call for gradual rate increases in its twice-yearly outlook on April 30 and cut its estimate for this fiscal year's expansion to 1.5 percent from 2.1 percent. It said consumer prices excluding fresh food will climb 1.1 percent, raising its inflation projection from 0.4 percent.

Agencies

(China Daily 05/21/2008 page21)