Bank of Japan Holds Rates Steady After 11th Straight Unanimous Vote

September 17, 2008

The Monetary Policy Board voted 7-0 in favor of retaining the 0.5% target on the uncollateralized call rate. The Board still has two vacancies.  Today’s decision was made on a day when the central bank also injected another $28.58 billion equivalent of yen to preserve the smooth functioning of local the money market, thus underscoring the separation of domestic monetary policy from the handling of the direct impact of the global credit crisis.  Japanese short-term money rates have not exceeded 0.5% since September 1995, and the target was last lifted in February 2007, 19 months ago.  BOJ officials now believe that CPI inflation (excluding fresh food) will remain around its current level of roughly 2.5% over coming months and moderate gradually in 2009.  That is well above short-term interest rate levels, and governor Shirakawa again warned that price risks had to be watched.  Despite this very accommodative real interest rate, tightening is ruled out, because growth is “sluggish,” the word Japanese monetary officials traditionally use to describe a recession. An eventual return to gradual moderate expansion continues to be forecast and will be contingent on more stable commodity prices and better conditions in Japan’s export markets.

BOJ officials have grown more worried about the global financial system.  The main modification in today’s statement from the one released after the August 19th meeting is to say that global financial market tensions have increased, whereas before such markets were called unstable.  At the press conference, Governor Shrirakawa applauded the rescue of AIG and said it ought to safeguard confidence in the dollar.  Critics of the bailout will no doubt label the Fed’s action as one more step down a path that will undermine the credibility of the Fed and Treasury and as such also in time weaken confidence in the dollar as a long-term store of value.



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