Bank of Japan Opens Two-Day Policy Meet, Division Over Interest Hike

Text of report in English by Japanese news agency Kyodo

Tokyo, Feb. 20 – The Bank of Japan began a two-day policy meeting Tuesday afternoon, with market players’ views divided over whether the central bank will raise its key short-term interest rate from the current 0.25 per cent.

The nine BOJ Policy Board members will decide whether to change the current policy of keeping the unsecured overnight call money rate at around 0.25 per cent at the end of their meeting on Wednesday.

During the last policy meeting in January, the nine policymakers left the key rate unchanged by a vote of six to three.

BOJ Governor Toshihiko Fukui has pointed to weak private consumption and mild inflationary pressure in prices in explaining why the bank has not tightened its credit grip since last July.

The release last Thursday of stronger-than-expected gross domestic product data for the October-December period of 2006 has boosted expectations of a rate increase among some market participants.

However, government officials have played down the annualized real 4.8 per cent GDP expansion in the fourth quarter of 2006, saying it simply shows a rebound from an annualized real 0.8 per cent growth in the July-September quarter.

On Monday, the government maintained its upbeat view of the Japanese economy in a monthly report, but remained cautious about private consumption trends.

Economic and fiscal policy minister Hiroko Ota said Tuesday morning that the government expects the BOJ to “carefully assess economic and price conditions based on its forward-looking approach” in deliberating a rate hike.

A forward-looking approach the BOJ says it employs in making monetary decisions is aimed at precluding future economic risks through preemptive action.

Finance Minister Koji Omi also said that Japan’s economy continues to experience a sustained recovery and repeated that the government expects the central bank to “support the economy from the monetary side.”

Influential politicians have been less vocal about the BOJ’s policy decisions this time, compared with the situation before the January meeting.

Hidenao Nakagawa, secretary general of the ruling Liberal Democratic Party, declined to comment on the BOJ’s rate discussions on Monday and said that he believes the government and the central bank share economic assessment and policy goals.

The BOJ decided to keep its key rate unchanged last month after a series of verbal warnings by Nakagawa and other politicians, leaving the impression that the central bank had succumbed to political pressure and that its independence from the government was impaired.

Yuji Tsushima, chairman of the LDP tax panel, also on Monday urged government officials and his fellow politicians to exercise caution in commenting on BOJ policies, saying, “The impression that politics meddles in will be negative, whatever the results (of the BOJ meeting) will be.”

The BOJ ditched its five-year-old quantitative monetary easing policy last March and implemented the first rate hike in around six years in July, raising the unsecured overnight call money rate to 0.25 per cent from around zero.

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