BOJ Held Rate at 0.5% on Market Concern, Minutes Show (Update2)

By Jason Clenfield


Nov. 16 (Bloomberg) -- The Bank of Japan refrained from raising interest rates in October because of concern ``unstable'' global financial markets could derail economic growth, minutes show.

``The bank should continue to examine upcoming economic indicators and other relevant information as well as financial- market conditions carefully,'' most members said, according to minutes from the Oct. 10-11 policy meeting published today.

Fallout from the U.S. subprime-mortgage collapse has wiped $1.8 trillion from world stock markets since Oct. 31, the yen has gained more than 4 percent and oil has approached $100 a barrel. Policy makers kept Japan's key rate on hold this week and Governor Toshihiko Fukui said the U.S. housing slump and market rout could get worse than the bank forecast.

``It's very difficult to anticipate an end to the global financial turmoil anytime soon,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. Shiraishi today pushed back his forecast for the next rate increase to the third quarter of 2008 from the first quarter.

The yen traded at 110.27 per dollar at 11:15 a.m. in Tokyo from 110.48 before the minutes were released. The Nikkei 225 Stock Average fell 1.6 percent and has lost 9 percent this month.

``Global financial markets continued to be unstable on the whole,'' the members said. A few said ``there was time to carefully assess developments in financial markets and the global economy as well as their effects on Japan's economy.''

Policy Unchanged

All nine board members agreed that there was no need to change the bank's policy of gradually raising interest rates. In the past month, Fukui has said Japan's key rate needs to rise from 0.5 percent, the lowest among major economies, to deter companies and traders from making risky investments, even as barriers mount against an increase.

Deputy Governor Toshiro Muto, the favorite to head the bank when Fukui's term ends in March, echoed the governor's view in an interview yesterday. He said expectations that borrowing costs will stay low for a long time could cause fluctuations in growth and prices and encourage inefficient investment.

``They're still very keen to raise rates,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``The question is when they'll get the opportunity. That might be as early as the first quarter of next year.''

Threat to Growth

Muto added that policy makers are ``fully aware'' growth in Japan would be threatened should the U.S. slowdown infect the rest of the world.

Federal Reserve Chairman Ben S. Bernanke said this month that the U.S. economy is likely to ``slow noticeably'' this quarter while high commodity prices and the weaker dollar may stoke inflation. Japan's exports to the U.S., its largest market, fell at the fastest pace in almost four years in September.

One Bank of Japan member said it was ``appropriate'' to raise the key rate to 0.75 percent, without elaborating. Atsushi Mizuno proposed an increase, as he has done at every meeting since July.

Another member said Japan's consumer prices and economy were at the ``lower end'' of the central bank's forecasts.

Policy makers later that month cut their projection for economic growth in the year ending March to 1.8 percent from 2.1 percent. They said core consumer prices, a key gauge of inflation, would be flat this year, after previously forecasting a gain of 0.1 percent.