Bank of Japan Upgrades Assessment And Leaves Key Rate at 0.10%

November 20, 2009

As it has done all this calendar year, the Bank of Japan left its overnight uncollateralized interest rate steady at 0.1%.  The vote was 8-0, and the decision was universally anticipated by analysts.  The two-day meeting had lasted just under 6-1/2 hours in all.  What had not been generally foreseen was a further upgrade in the central bank’s overall assessment of the economy to “is picking up” and in specific views about export demand and industrial production, each of which “has been rising against the backdrop of progress in inventory adjustments both at home and abroad as well as an improvement in overseas economies, especially a recovery in emergency economies.”  To be sure, monetary officials still see warts such as continuing severed employment and income situations, lingering severities in the financial environment, substantial slack that is depressing consumer prices, and weak profits.  But consumption “is picking up,” the drop in private investment is “coming to a halt,” and public investment is still “increasing.”  Officials characterize the recovery now as “gradual” but expect such to quicken aft the middle of 2010.  Consumer price deflation will accordingly lessen.

Government officials have been expressing greater anxiety over Japan’s entrenched deflation and urging BOJ officials to address the problem.  This posturing has been noticed by market players.  Normally, currencies suffer when politicians and central bankers expose their differences in public, but the yen’s circumstances suggest otherwise.  The yen’s tendency has been toward strength.  It traded on the strong side of 90/$ most of this week and touched the high 80s on each day of the period.  Like the dollar, the low-yielding yen tends to get bid when risk aversion rises, and the risk preference pendulum has been swinging that way lately.  If politicians and central bankers disagree, a vacuum results, and currencies are liable to trade with the same properties that they had been lately exhibiting.  A strong yen and an unchanged yuan policy spells trouble for Japan’s recovery and for it soaring public debt.  Meanwhile, analysts have not found the 4.8% annualized growth rate of Japan last quarter to be comforting, since it stemmed from temporary and unsustainable factors.

The next six BOJ policy meetings are scheduled for 02/17-18, then 01/25-36, 02/17-18/, 03/16-17, 04/6-7, and April 30, 2010.

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


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