Bank of Japan Policy Preview

May 19, 2008

No chance whatsoever exists that this week’s 2-day interest rate meeting will change the 0.5% target for overnight money. The decision will be announced about 14 hours from now. This will be the 19th consecutive meeting that adopts a target of 0.50%, and the seventh straight unanimous vote. Real GDP growth of 3.3% in 1Q08 surpassed expectations but was overstated by the failure to completely adjust all figures to the inclusion of a “leap day” on February 29th. Moreover, growth in 4Q was revised downward to 2.6% saar from 3.5%, and on-year growth of 1.0% was the smallest four-quarter advance in real GDP since 4Q04 and the second smallest since 2Q02. Also, many monthly indicators, like machinery orders, consumer confidence, the Economy Watchers’ survey, the Shoko Chukin index, and the Reuters simulated monthly Tankan indices are going south in a hurry. At the previous meeting, the Policy Board abandoned a 2-year-old bias toward rasing rates. However, with core inflation above 1.0% and oil prices still cresting, officials are no more likely to cut rates at this point than are their counterparts at the ECB.

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