Thursday, November 16, 2006

Japan interest rates on hold - for now

Japan’s central bank has decided to keep interest rates frozen at 0.25%, as the policymakers take stock of the pace of recovery before taking the rates northward. The decision was widely expected by the market.

Bank of Japan ended its five-year policy of keeping base rates at zero in July this year, in a bid to stimulate growth. Japan's economy grew more strongly than expected in the third quarter, but consumer demand has remained sluggish.

The strong economic growth suggests that rate hike may come as early as next month. The next policy meeting of the central bank is scheduled for December 18-19 and the policy-makers will have more data to make a thorough assessment of economic and price situation. The economy grew at a 2 percent annual rate in the last quarter. The revised third-quarter GDP figures will be published on December 8 and the central bank's quarterly Tankan survey a week later. The most recent Tankan business survey last month showed strong business confidence.
US FOMC minutes hawkish again, inflation eases, Japan rates untouched

US Fed officials maintain a hawkish tone on inflation in the minutes of the last month’s meeting. The Federal Open Market Committee, which decides on interest rates on monetary policy actions, had decided to keep interest rates on hold at its October 24-25 meeting.

This marks a pause for the third time in a row. US interest rates have risen over the past two years as the world's largest economy has recovered and price growth has picked up. The US central bank has kept interest rates steady at 5.25% since August, and is expected to maintain its current stance when it meets next month.

According to the minutes released Wednesday, the Fed noted that reducing inflation to counter expectations of higher prices was its 'greatest concern' and worried that inflation might not recede as hoped and an inflationary psychology could set in, making its job tougher. It assessed that core inflation was still uncomfortably high and that a tight labour market could lead to wage pressures. However, Fed officials also observed that high profit margins may be able to absorb some part of the higherlabour costs. On the housing market, the minutes said that ongoing adjustment was likely to depress real activity in the near term, but thatthis effect was expected to wane gradually.

Meanwhile, consumer prices fell in October for the second month in a row, on the back of cheaper oil. The reading will offer some comfort to the policy-makers when they meet next month. The Labor Department said that prices fell by 0.5% in October, more than many analysts had forecast. The annual inflation rate was 1.3%.

The Bank of Japan (BoJ) voted to keep policy rates steady, as widely expected. Japanese GDP grew 2% annualised for the quarter ended September, twice thatexpected, but the data did not provide sufficient fuel for the BoJ to act this time around.

Tuesday, November 14, 2006

Japan's growth beats forecasts, rate hike may come sooner

Japan's economy has recorded strong growth for the July-September quarter, quelling any fears that the world's second largest economy could be slowing. Growth at an annualized rate of 2% during the period – supported by strong exports and greater investment by firms - is higher than expected. Exports rose 2.7% in the quarter, helped by the weak yen, while capital investment grew by 2.9%.

The strong growth has once again fueled the speculation on interest rate hikes. In July this year, Bank of Japan raised interest rates for the first time in six years to 0.25% riding on the longest post-war expansion. The timing of follow-up hikes has been a matter of speculation in the market. It left rates unchanged at 0.25% in October and has maintained that it would gradually adjust monetary policy based on economic and price conditions. The US Federal Reserve has kept interest rates at 5.25 percent since August. The European Central Bank's benchmark stands at 3.25 percent.

Bank of Japan Governor Toshihiko Fukui said last week the central bank needs to act "in advance" to prevent the lowest interest rates among major economies from triggering excessive capital investment. He said "we must not take a long time to adjust policy interest rates," and "waiting for inflation to build up" would cause sharp swings in the economy.

A large section of the market now believes that the central bank will raise interest rates early next year, although some see the possibility of the hike coming as early as in December. The Bank of Japan concludes a two-day policy meeting on November 16, when it is widely expected to leave rates at 0.25 percent.