Preview of Japanese Interest Rate Policy Decision

July 14, 2008

Sometime around midnight on the U.S. east coast tonight, the Bank of Japan will announce no change in its 0.5% overnight money target.  This decision will extend the time frame for this target level to 18 months, and the status quo probably will be retained at least until the end of this year.  BOJ Governor Shirakawa’s Tuesday press conference starts at 06:30 GMT (15:30 JST).  Officials will announce revisions of their semi-annual growth and inflation forecasts.  Because of much higher-than-assumed oil prices, the forecasts from end April of 1.5% growth in the current fiscal year will get revised down, while that of 1.1% core CPI inflation will undoubtedly get bumped higher.  The Fukuda cabinet’s monthly economic report released earlier today flagged softening confidence among both consumers and in the corporate sector.  In comparisons of April-May to 1Q averages, industrial production, private domestic machinery orders, and foreign orders for machinery respectively fell 0.6%, 0.1%, and 2.7%.  Nominal and real exports went up more slowly y/y in those two months, and the trade balance for June 1-20 swung to a deficit of Y 230 billion from a surplus of Y 449 bln a year earlier with export growth decelerating additionally.  The performance among smaller firms has worsened.  Producer prices for goods, +5.6% y/y, are at their highest since 1981, but consumer price inflation excluding energy as well as seasonal food still hovers around zero.  Growth weakened in 2Q08 in all but one of Japan’s nine regions, and a reasonable prospect exists that overall GDP may have contracted in that quarter.  Construction orders and housing starts were 25.2% and 6.5% below year-earlier levels in May.  First-half bankruptcies advanced some 7% from their level in 1H07.  Low Japanese interest rates deprive authorities of easy leeway to stimulate monetary policy, unless they revert to quantitative easing which was employed during the economy’s heyday of deflation.  There has been no talk of going down that policy road again.  But at least the yen has weakened against the euro and stayed on the weak side of 100 per U.S. dollar.  Such has averaged 106.7/$ so far in July, similar to June’s mean of 106.9 and down from 104.3 in May and 102.6 in April.



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