International
Bank of Japan keeps key interest rate at 0.50%; Economic growth recovers in third quarter
By Finfacts Team
Nov 13, 2007, 06:44

Bedtime reading or a cure for insomnia? Prime Minister Yasuo Fukuda (r) received the FY2006 Audit Report from Muneharu Otsuka, the President of the Board of Audit, at the Prime Minister's Official Residence on Friday, Nov 09, 2007.

The Bank of Japan decided at its monthly meeting today to keep its key interest rate unchanged at 0.5%. In a statement, the central bank said that the economy is expanding moderately.

Also on Tuesday, it was reported that Japan's economy grew faster than economists forecast in the third quarter as an unexpected increase in consumer spending countered a fall in housing construction.

The world's second-largest economy grew at an annualized 2.6% in the three months ended Sept. 30 from a revised 1.6% contraction in the previous period, the Cabinet Office said in Tokyo.

Consumer spending, accounting for more than half the economy, grew 0.3% from 0.2% in the second quarter.

The yen is appreciating “too fast” and speculators need to “be careful”, Yasuo Fukuda, Japan’s Prime Minister, warned in an interview with the Financial Times on Monday.

As the yen moved to an 18-month high of Y109.13 to the US dollar on Monday night, Fukuda said: “In the short term, yen appreciation would certainly be a problem. Any kind of sudden change in exchange rates would not be desirable.”

While he stopped short of threatening Japanese intervention in the currency markets, Mr Fukuda said: “Speculative movements need to be kept in check. What I am saying is: ‘Be careful, so that it [intervention] will not happen.’”

Bank of Japan Statement:

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 trend upward against the background of high corporate profits.  Housing investment has fallen lately.  Private consumption, however, has been firm in a situation where household income has continued rising moderately.  With the rise in demand both at home and abroad, production has continued to be on an increasing trend.

Japan's economy is expected to continue expanding moderately.

Exports are expected to continue rising against the background of the expansion of overseas economies as a whole.  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 likely to continue increasing for the time being, 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.  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, the yen has appreciated against the U.S. dollar compared with last month, while long-term interest rates and stock prices have fallen compared with last month.