Bank of Japan Upgrades Assessment, Leaves 0.1% Rate Target

May 22, 2009

The target for overnight call money will remain at 0.1% where such has been since being cut from 0.3% on December 19th.  The rate vote, after five hours and 42 minutes of deliberations over two days was 8-0.  All rate votes since December 2007 have been unanimous.  The BOJ expanded eligible collateral to include sovereign U.S., British, French and German bonds.  A statement from the BOJ upgraded the economic assessment for the first time in three years but stressed the persistence of very great uncertainty and significant downside risks.  The previous assessment had said the economy is “deteriorating sharply,” and the new one still observes that the economy is “deteriorating” but that rates of decline in exports and production seem to be leveling.  A recovery in these items is projected to start in the second half of this fiscal year, that is sometime after September, but core consumer price inflation will be negative.  Financial conditions have become somewhat less restrictive.  The key to sustained recovery in Japan as elsewhere lies in improving final demand now that significant inventory adjustments are underway.  I would simply add that a further negative wealth effect needs to be avoided, or personal consumption will be weaker than officials have assumed.  Mounting worries about excessive deficit spending are boosting long-term interest rates and have caused stock markets to relinquish some of their post-March gains.

The BOJ is unlikely to raise rates before 2H10.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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