Bank of Japan Preview: No Rate Change Seen

September 17, 2008

BOJ officials in August conceded that Japan probably is in a recession but not one that warrants additional loosening of an already quite-accommodative stance, where the overnight target rate has been at 0.5% since February 2007.  In doing so, they downgraded their assessment for a second straight month and downgraded the outlook for exports, which had been a growth mainstay.  Consumption and consumer confidence are depressed, but investment seems to be holding up better than feared.  Industrial output rebounded 1.3% in July from a 2.2% drop in June, further suggesting that 3Q is not developing as weakly as assumed.  If there is a concern, it’s the deteriorating global financial situation, one result of which has been upward pressure on the yen.  Since the August BOJ policy meeting, Japan’s currency has risen 6.6% against the euro and 3.2% against the dollar.  An announcement of no change in rates will be made in about three hours and surprise nobody.  It is Governor Shirakawa’s subsequent press conference and the new monthly assessment that will  attract attention. I do not expect Shirakawa to deviate much from his message in August, other than to acknowledge the delicate world financial situation is been monitored carefully.  Likewise, the assessment will probably be left unchanged.  Officials will call the downturn shallow, predict a return to moderate expansion, and warn that risks are also associated with keeping an ultra-loose policy for too long.

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