The Bank of Japan (BOJ) will keep monetary policy unchanged today because an economic recovery hasn't ended deflation, economists said. Governor Toshihiko Fukui will probably repeat the bank's commitment to zero rates, some said.

Fukui and his eight board colleagues will keep the upper limit of their target for reserves available to banks at 35 trillion yen (US$323 billion) and leave the key interest rate unchanged at a one-day meeting in Tokyo, said all 15 economists surveyed by Bloomberg News.

Bond yields have been rising on a series of reports suggesting Japan is likely to extend its longest recovery since 1997 and on expectations the central bank might change its policy of pumping money into the economy, known as quantitative easing. Fukui and other officials have tried to damp speculation about a change in policy.

"With the recent gain in interest rates, Governor Fukui will probably repeat the bank's commitment to maintaining its quantitative easing policy," said Kazuhiko Sano, Tokyo-based chief strategist at Nikko Citigroup Ltd.

The bank left policy unchanged last week. Fukui is scheduled to speak at a press conference at 3:30 pm today at the bank.

The bank last week raised its assessment of the economy, saying it is "gathering stronger momentum" as rising corporate profits boost job creation. Fukui said then that there is "no room for speculation" about a change in policy.

"Officially, the Bank of Japan has sealed off discussions of an exit from current policy," said Masaaki Kanno, a former BOJ official and now chief economist at JP Morgan Securities Asia Ltd. "But the bank will soon start debating when and how to fill the gap between its economic assessment, which was substantially upgraded in June, and its price outlook."

Yields on the benchmark 10-year government bond rose as high as 1.94 per cent last week, the highest since September 2000. The yield was at 1.915 per cent as of 11:05 am yesterday in Tokyo.

The bank pushed overnight loan rates close to zero by raising its target for reserves available to lenders in March 2001, aiming to halt deflation and spur economic growth. It has pledged to maintain the policy until core consumer prices, which exclude fresh food, stop falling and it's sure they won't resume sliding. Core prices have risen one month since April 1998.

The policy board predicted in April that nationwide core consumer prices, the bank's key price gauge, would fall 0.2 per cent in the fiscal year ending March 31. Board members will publish consumer price forecasts for next fiscal year in October.

"BOJ policy makers will probably say in their October report that they expect core consumer prices to be positive next fiscal year," said Seiji Shiraishi, chief market economist at Daiwa Securities SMBC Co in Tokyo.

Japan's statistics bureau were to release nationwide consumer prices for May at 8:30 am today in Tokyo. Core consumer prices probably fell 0.2 per cent last month from a year before, according to a median of 30 economists surveyed by Bloomberg News.

Ten of the 15 economists surveyed on the policy meeting said the bank would probably end quantitative easing as early as next fiscal year, with five predicting a change in calendar 2006. In a survey of 14 economists conducted two weeks ago, seven said the policy would be scrapped as early as next fiscal year.

Ryutaro Kono, chief economist at BNP Paribas Securities in Tokyo, moved his prediction for the end of quantitative easing to next year from his earlier forecast of 2007 or 2008. He said receding expectations for deflation will boost spending by households and non-manufacturing companies and spur domestic demand, offsetting any adverse effects of a possible slowdown in overseas economies.

Economists are divided on when the bank will raise interest rates from close to zero.

Four of the 15 economists predicted it will raise rates next fiscal year, six said in calendar 2006 and three said no earlier than in 2007. Two made no prediction.

Minutes of the meeting will be published on August 13.

(China Daily 06/25/2004 page12)