Bank of Japan seen on hold as Fed cuts rates

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TOKYO, Sep 19 (Reuters) The Bank of Japan is seen holding off raising interest rates on Wednesday, hours after the U.S.

central bank slashed rates by a hefty half-percentage point to try to shield the U.S. economy from a housing slump and market turmoil.

Although the Japanese central bank has been aching to boost Japanese interest rates from current low levels, investors think it will have to let things lie for now in light of growing economic risks -- at home and around the globe.

Instead, the focus is on Governor Toshihiko Fukui's comments and whether a lone dissenter on the policy board has changed his mind, after backing rate hikes at recent rate reviews.

Preying on their minds are shaky world financial markets and no sign yet that U.S. housing markets have bottomed yet, raising concerns that the overall U.S. economy could sputter.

Against that backdrop, the U.S. Federal Reserve cut its main policy rate on Tuesday to 4.75 percent from 5.25 percent -- its first cut in four years -- saying it needed to forestall adverse effects from troubles in housing sector and financial markets.

"The BOJ will also cooperate with U.S. and European central banks by holding rates," said Susumu Kato, chief economist at Calyon Capital Markets.

Recent Japanese economic news has not been encouraging, either. Manufacturers' business confidence slipped to a two-year low, Reuters survey showed on Tuesday, and Japan's economy contracted in the last quarter.

The BOJ's meeting also comes in the middle of a political crisis after the Japanese prime minister suddenly quit.

Swap contracts on the overnight call rate and three-month euroyen futures suggest market players see no chance of a rate hike on Wednesday and only a limited chance of an increase even by the end of year.

That is a sea change from less than two months ago, when two rate hikes by next March were priced in.

The BOJ is expected to end the second day of its two-day policy meeting some time between noon and 2 p.m. (0300-0500 GMT).

Fukui is due to hold a news conference at 3:30 p.m. (0630 GMT).

NO DISSENT? Expectations of a future rate hike could retreat further, analysts say, if board member Atsushi Mizuno, who called for a rate hike in July and August, drops his objection to keeping rates steady.

Mizuno said in late August that global market turmoil would have a limited impact on the Japanese economy and he did not see needs to change his stance as long as the Fed cut rates as an insurance against possible economic deterioration.

But he also said the basis of discussion would change if the Fed would slash rates on unexpected downturn in the U.S. economy, adding that the U.S. labour market -- since shown to be much weaker than expected -- held the key.

The big questions for the BOJ will be how long it will take for financial markets to regain some composure and to what extent growth in the United States, a key export market for Asia, is threatened.

But many at the Bank of Japan have so far stuck to a view that the U.S. economy will have a soft landing, posing only a limited threat to growth in Japan.

The central bank is due to revise its economic forecast in a twice-yearly economic report in October and BOJ officials say at the moment they do not see the need to radically change their forecast of 2.1 percent growth in the fiscal year to next March.

"I think the BOJ may mention downside risks to the economy but will not change the overall judgement on the economy. It will also maintain the stance of gradual rate hikes while watching markets," Kato said.

After more than five years of zero interest rates, the BOJ last year started 'normalising' Japan's ultra-low interest rates as the bank feels they are disproportionately low in light of steady growth in the economy.

REUTERS RC BST0655

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