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| Bank of Japan Governor Toshihiko Fukui |
At the Monetary Policy Meeting held today in Tokyo, the Bank of Japan decided, by an 8-1 majority vote, to keep its key interest rate - overnight call rate - unchanged at 0.5%.
Governor Toshihiko Fukui supported the move to keep the key rate on hold.
The Bank of Japan was expected to raise the key interest this month from the lowest among major economies.
In February 2007, the Bank raised the interest rate by a quarter percentage point to 0.5%, judging the economy strong enough to handle higher borrowing costs despite weak inflation. In July 2006, the Bank of Japan ended its zero-interest-rate policy and set the rate at 0.25% rate.
Governor Fukui had said in early August that keeping rates low for too long may cause the misallocation of resources but the current global credit crunch coupled with recent economic data, dashed hopes of a rise.
It was reported on Wednesday that the trade surplus fell 21.1% in July from a year earlier to ¥671.2 billion (€4.3 billion; $5.9 billion), the first decline since January, the Finance Ministry said in Tokyo today.
Export growth to the US market fell to 1.3%, a fifth of the rate of the previous month, reflecting the impact that the recession in the US housing market may be having on consumer spending on cars and electronics. The yen has risen 3.7% against the US dollar this month, which may further impact exports.
Japanese car manufacturers in particular, are particularly dependent on export growth as domestic car sales have fallen every month in the past fifteen and in March 2007, car sales in Japan fell to a 30-year low. (click for article: Tough Times in the Wealthiest Nation on Earth)
Annual wage increases have been as low as $100 for a typical worker with a family and economic growth almost stalled in the second quarter.
Last week Reserve Bank of Australia Governor Glenn Stevens told his country's parliament that ``the sooner the Japanese interest rates are able to be normal again, the better from the point of view of the global financial system.''
In his half-yearly testimony to the Australian Parliament, Stevens described Japan’s interest rates as “fundamentally a distortion”.
The Japanese yen is believed by some to be at the centre of a massive, long-term mispricing of risk by hedge funds. The investment strategy known as the yen carry trade has been the basis of nearly a decade of cheap financing for speculative investments.
Last week, as the trade was unwound, the yen rose to its biggest weekly gain against the US dollar in almost nine years. It has also made large gains against the Australian and New Zealand dollars. The Reserve Bank of Australia intervened to support its dollar for the first time in six years yesterday, reducing losses versus the yen over the past two weeks to about 20 per cent.
The Bank of Japan rate of 0.50% compares with the Reserve Bank of New Zealand's rate of 8.50% and Australia's 6.5%; China's 7.02%; US Fed's 5.25%; Bank of England's 5.75% and the European Central Bank's 4.00%
THE FOLLOWING IS THE BANK OF JAPAN'S SUMMARY ON THE ECONOMY, PUBLISHED TODAY:
Japan's economy is expanding moderately.
Public investment has been sluggish. Meanwhile, exports have continued to increase, and business fixed investment has also continued to increase against the background of high corporate profits. Household income has continued rising moderately, and in this situation, private consumption has been firm. Housing investment has been more or less flat. With the rise in demand both at home and abroad, production has continued to be on an increasing trend, although it has been flat most recently.
Japan's economy is expected to continue expanding moderately.
Exports are expected to continue rising against the background of the expansion of overseas economies. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to be on a downtrend.
On the price front, the three-month rate of change in domestic corporate goods prices has been positive, mainly due to the rise in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been around zero percent.
Domestic corporate goods prices are expected to continue increasing in the immediate future, primarily reflecting the rise in international commodity prices. The year-on-year rate of change in consumer prices is expected to be around zero percent in the short run. From a longer-term perspective, however, it is projected to continue to follow a positive trend, as the output gap continues to be positive.
As for the financial environment, the environment for corporate finance is accommodative. Credit demand in the private sector has been more or less flat lately. However, the issuing environment for CP and corporate bonds has been favorable, and the lending attitudes of private banks have continued to be accommodative. Under these circumstances, the amount outstanding of lending by private banks has been increasing moderately, and the amount outstanding of CP and corporate bonds issued has been above the previous year's level. Funding costs for firms have risen slightly. Meanwhile, the year-on-year rate of change in the money stock is around 2 percent. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.5 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, against the backdrop of increased global uncertainties stemming from the subprime mortgage problem in the United States, long-term interest rates and stock prices have fallen compared with last month. Meanwhile, the yen's exchange rate against the U.S. dollar has risen.
