Bank of Japan May Focus on Risks to Recovery, Keep Rate at 0.1%

By Mayumi Otsuma


Aug. 11 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa may today focus on the risk that recent economic improvements will fail to translate into a sustainable recovery and price declines will keep falling.

The policy board will hold the key overnight lending rate at 0.1 percent at a meeting in Tokyo, according to all 22 economists surveyed by Bloomberg News. The board will refrain from unveiling any new policy measures a month after extending credit-easing programs by three months to Dec. 31, they said.

The Nikkei 225 Stock Average has risen 49 percent from a 26-year low in March on expectations Japan is overcoming its worst postwar recession. Economists say any recovery is likely to be weak because shrinking profits will force companies to cut spending and shed workers.

“The Bank of Japan will remain cautious about the outlook, even though expectations for a global recovery are surging in financial markets,” said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. “Board members will probably retain the phrase ‘significant uncertainty’ in their statement” to be published after the meeting, Kato said.

The key rate will stay unchanged at least through 2010, according to 12 of 16 economists surveyed by Bloomberg News. The policy meeting will probably end early this afternoon in Tokyo, and Shirakawa will speak to the press at 3:30 p.m.

Improvements in exports and production helped the world’s second-largest economy expand 3.9 percent in the three months ended June 30 after contracting for four quarters, analysts predict a report will show next week. The revival has yet to spur business investment and consumption, which together account for more than two-thirds of the economy.

Machine Orders

Machinery orders, an indicator of capital spending in the next three to six months, will fall 8.6 percent in the current quarter, the Cabinet Office said yesterday.

“The economy appears to have regained momentum temporarily, but few people are convinced that we’re seeing the beginning of a lasting recovery,” said Teizo Taya, a former central bank board member and now an adviser to the Daiwa Institute of Research in Tokyo. “As the job market will keep deteriorating and wages will suffer, there is no prospect for a rebound in consumption.”

Prime Minister Taro Aso is struggling to steer the economy toward a recovery as his ruling Liberal Democratic Party trails the opposition Democratic Party of Japan in polls ahead of an Aug. 30 election.

Falling Prices

Shirakawa may indicate that deflation is likely to become more entrenched as domestic demand weakens. Policy makers will probably forecast price declines will extend into the year ending March 2012 even as the economy recovers, according to two people familiar with the matter. Consumer prices excluding fresh food slid a record 1.7 percent in June from a year before.

Federal Reserve policy makers may decide tomorrow to let their $300 billion program of purchasing long-term Treasuries expire in September, former governors Lyle Gramley and Laurence Meyer said this month. In contrast with the Bank of Japan, the Fed and other central banks face the threat that inflation will accelerate should they fail to remove excess cash from their economies fast enough.

“Given that the problem of inflation matters the least in Japan among major economies, the Bank of Japan will have plenty of time to observe how other central banks unwind extraordinary measures” before it ends its own, said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo.

Credit Programs

The Bank of Japan lowered the key rate to 0.1 percent in December and has since begun purchasing corporate debt and providing unlimited loans backed by collateral to lenders. Some economists say the bank may set prerequisites for raising the rate to signal to investors that it’s not in a hurry.

“A rate increase is still far off, and BOJ policy makers will probably discuss presenting the preconditions for ending their policy commitment to avoid misleading market expectations,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. The central bank may outline any requirements for raising the key rate around the time it ends the emergency credit-easing programs, she said.

Japan’s central bank set conditions for ending a policy of keeping interest rates near zero in 1999, saying it wouldn’t raise them until concerns about deflation were dispelled.