Suda Says Bank of Japan Should Keep Raising Rates
The Bank of Japan should keep its policy of gradually raising interest rates, board member Miyako Suda said, while acknowledging the need for flexibility given that growth may fall short of the central bank's forecast.
“It is natural to continue pursuing higher interest rates'' because monetary conditions are “very accommodative,'' Suda said in a speech today in Miyazaki, southern Japan. As growth may slow and global financial markets remain volatile, “it is time for us to examine both upside and downside risks closely without any preconceptions,'' she added.
The risk of a recession and worsening sentiment among businesses and consumers have investors betting the central bank will reverse its policy and cut rates this year. Deputy Governor Kiyohiko Nishimura also stressed the need for flexibility in parliamentary testimony today, as did acting Governor Masaaki Shirakawa this week, when he said the economy faces uncertainty.
“The bottom line of Suda's speech is to emphasize that the central bank can take flexible steps,'' said Yoshimasa Maruyama, a senior economist at BNP Paribas in Tokyo. That suggests “she hasn't ruled out the possibility of cutting rates.''
Investors see a 49 percent chance the central bank will cut the benchmark interest rate from 0.5 percent by December, according to JPMorgan Chase & Co. calculations. Japan's key rate is already the lowest among major economies.
U.S. Slowdown
The yen traded at 98.96 against the dollar as of 1:47 p.m. in Tokyo from 98.74 before the speech. The yield on Japan's five-year note fell 2 basis points to 0.725 percent.
A U.S. slowdown and the yen's 13 percent surge against the dollar this year are prompting caution among companies as the Japanese economy's longest postwar expansion loses steam. U.S. growth slowed to a near standstill in the fourth quarter, economists expect a government report to show today.
“The economic outlook is highly uncertain,'' Nishimura told an upper house parliamentary committee. “Without having any preconceptions, we will make a flexible policy judgment by examining our forecasts and the risks.''
Nishimura said the bank will retain its policy of gradually raising rates as long as Japan's economy keeps expanding fast payday loans payday loans. Suda, the policy board's longest-serving member, said the economy may grow at a slower pace this year than the central bank forecast.
“I see a high possibility that fiscal 2008 growth will be lower than projected and that the ability to forecast the outlook has been thickly clouded by increased instability in financial capital markets,'' she said.
Slower Growth
Growth could be as low as the mid-1 percent range in the year starting April 1, she said, slower than the Bank of Japan's 2.1 percent forecast made in October.
Production had its biggest drop in a year in January and profits fell last quarter, prompting the government to cut its evaluation of the economy for the second straight month in March.
The central bank's Tankan quarterly business survey on April 1 will show confidence among the nation's largest manufacturers falling to a four-year low, economists estimate.
Suda described a recent drop in Japan's stock market and the yen's rise to a 12-year high last week as “abrupt,'' and said the moves are “having a negative impact on sentiment to some degree.''
She said she will examine the Tankan survey for signs of how the financial-market turmoil affects capital spending plans and profits at “already-weak'' small and medium-sized companies.
Consumers probably won't be able to pick up the slack from companies. Falling wages, rising costs of food and oil and a slumping stock market dragged household sentiment to a five-year low in February. The Nikkei 225 Stock Average has lost 18 percent of its value this year.
Suda, a former economics professor at Gakushuin University in Tokyo, said the cycle of profits feeding into higher wages and household spending is weakening, though it remains intact.