Japan's central bank will probably keep monetary policy unchanged this week because an accelerating economic recovery hasn't ended six years of price declines, economists said.

Governor Toshihiko Fukui and his eight policy board colleagues will maintain the upper limit of the bank's target for reserves available to lenders at 35 trillion yen (US$318 billion) and keep interest rates at almost zero at a two-day meeting ending today, said 14 economists surveyed by Bloomberg News.

The government last week raised its estimates for first-quarter growth to a 6.1 per cent annual pace from 5.6 per cent. Japan's longest recovery since 1997 has led economists including Atsushi Mizuno to predict that deflation may be nearing an end, prompting the central bank to abandon its policy of pumping money into the economy as soon as next year.

"Though the Bank of Japan hasn't changed its stance towards fighting deflation, its next step will probably be to exit from its policy of quantitative easing," said Mizuno, vice-chairman of the global market division of Deutsche Securities Ltd in Tokyo. "It's just a matter of time before we see the central bank end the policy."

Japanese 10-year bonds fell for a record 13th day. The yield on the benchmark 1.6 per cent bond due in June 2014 rose 6.5 basis points to 1.845 per cent as of 4:59 pm in Tokyo. A basis point is 0.01 of a percentage point.

The central bank pushed overnight rates close to zero by raising its target for reserves available to lenders in March 2001, aiming at halting deflation and supporting economic growth.

The bank has pledged to maintain the quantitative easing policy until core consumer prices, which exclude fresh food, stop falling for at least for a few months and it ensures prices won't resume sliding.

Nationwide core consumer prices, which have risen once since April 1998, fell 0.2 per cent in April from the year before, compared with a 0.4 per cent drop in April 2003 and a 0.9 per cent decline in the same month of 2002.

Fukui told parliament last week the recent slowdown in consumer price declines shows that "the distance to achieving stable prices is shortening" and Japan is now "close to the final stage of beating deflation." Still, some distance remains to be covered until deflation ends, he said.

"The central bank would accept a rise in long-term rates as long as they move in line with the pace of economic growth," said Masaaki Kanno, a former central bank official and now chief economist at J.P. Morgan Securities Asia Ltd. "If 10-year bond yields exceed 2 per cent, however, the Finance Ministry would probably start pressuring the bank "to pump more money into the economy."

Japan plans to spend 17.6 trillion yen (US$156 billion) for interest payments and other debt-servicing costs this year, one-fifth of the total budget. The ministry made the allocation on the assumption that 10-year bond yields would be at 2 per cent.

Bond yields may rise further on signs the recovery is picking up steam. Machinery orders, a harbinger of capital investment, rose 11.8 per cent in April, the highest since August 2001. A slide in bank lending slowed to 4.1 per cent in May, the smallest monthly decline since October 2001.

Seven of the 14 economists surveyed said they expect the bank to shift away from the quantitative easing policy as early as next year. Six economists said the bank will probably end the policy in 2006, and one said the bank will keep the policy unchanged at least until 2007.

Yasunari Ueno, chief market economist of Mizuho Securities Japan Ltd, said the bank will keep borrowing costs near zero for a few years even after it switches its key policy tool to interest rates from its reserve target.

"If the economic recovery is maintained and consumer prices start to rise, then the Bank of Japan may abandon the quantitative policy framework as early as late 2005," Ueno said. "Even so, we expect the bank will hold borrowing costs near zero until around 2008."

BOJ policy-makers predicted in April that core consumer prices will decline 0.2 per cent in the fiscal year ending March 2005. They will release their next forecast in October.

"There is a chance that BOJ board members will predict a rise in consumer prices in their October report," said Kazuhiko Sano, chief strategist at Nikko Citigroup Ltd.

The central bank will announce any policy decisions probably today. The bank will release its monthly economic report at 3 pm and Fukui will speak at a press conference at this afternoon. Minutes of the meeting will be published on July 16.

(China Daily 06/15/2004 page12)