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Japan moves its interest rate up from zero { January 2007 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601101&sid=adZeTEok.SwY&refer=japanhttp://www.bloomberg.com/apps/news?pid=20601101&sid=adZeTEok.SwY&refer=japan
BOJ Needs to Keep Raising Interest Rates, Mizuno Says (Update5)
By Mayumi Otsuma
Feb. 28 (Bloomberg) -- The Bank of Japan needs to keep raising interest rates, board member Atsushi Mizuno said, a week after he and his policy colleagues voted to increase borrowing costs for the second time in six years.
``We aim to gradually adjust interest-rate levels according to changes in the economy and prices,'' Mizuno said today in a speech in Sendai, Japan. He said it's important to push forward ``interest-rate normalization.'' Mizuno was one of three board members who unsuccessfully proposed a rate increase in January.
The state of the global economy doesn't warrant a further slide in stock prices, Mizuno later told reporters, after a plunge in Chinese shares sparked a slump in global equity markets. The central bank's next rate increase may be earlier than financial markets forecast, even before a July election, said Masuhisa Kobayashi.
``We have to bear in mind the possibility that the Bank of Japan will move to increase rates again as early as June, before the upper house election,'' said Kobayashi, chief Japan bond strategist at Barclays Capital.
The yen rose to a seven-week high yesterday after China's benchmark stock index tumbled 9.2 percent, igniting a global sell-off in equities and riskier assets in emerging markets. Japan's Nikkei 225 Stock Average tumbled 2.9 percent to 17,604.12 at today's close. The broader Topix index fell 3.2 percent. Both gauges had the biggest drop since June.
`Pretty Accommodative'
``All I can say is that we will closely monitor developments,'' Mizuno told reporters after the speech. ``If the slump wasn't temporary we'd have to worry about it, but I don't think the economy's fundamentals will lead to a more serious situation in this case.''
The yen fell to 118.61 per dollar at 4:58 p.m. in Tokyo from 117.93 late in New York yesterday, after government reports showed a drop in industrial production and retail sales.
The central bank doubled its benchmark overnight lending rate to 0.5 percent on Feb. 21. Japan's key rate remains dwarfed by the U.S. Federal Reserve's 5.25 percent and the European Central Bank's 3.5 percent. Mizuno said Japan's interest rates, particularly short-term rates, remain ``pretty accommodative.''
Mizuno, together with Miyako Suda and Tadao Noda, proposed a rate increase in January, according to minutes of the meeting released this week. The six other policy makers turned down the proposal, saying they needed more information to confirm the strength of the economy and prices.
The central bank's decision to keep rates on hold in January made it harder for investors to predict its policy actions, he told reporters today, reiterating comments shown in the minutes.
What's Normal?
Governor Toshihiko Fukui last week said the central bank will increase interest rates ``gradually, as much as possible'' to regain its ability to manage the economy with its main tool, a process he has described as policy normalization.
Mizuno, 47, didn't specify the level at which he considers interest rates to be normal, only saying: ``It's desirable that policy target rates will naturally match levels reflecting the economy's fundamentals.''
``The normal key interest rate for Japan is probably around 2 percent from analyzing past data,'' said Taro Saito, senior economist at NLI Research Institute in Tokyo.
Japan's economy will probably grow about 2 percent, exceeding its potential growth rate, in the year starting April 1 and the following fiscal year, Mizuno said.
``The central bank, from now on, will probably drum up the need to normalize its monetary policy'' as a reason to push up interest rates, said Hiromichi Shirakawa, a former Bank of Japan official who's now chief economist at Credit Suisse in Tokyo.
Consumer Prices
The global economy will grow about 5 percent over the next two years, Mizuno said. Chances that the U.S. economy will achieve a ``soft landing'' are increasing, he said, adding that the risk of consumption slowing there is diminishing considerably.
Mizuno told reporters he ``doubts'' the central bank's policy will be affected by recent U.S. economic data that prompted some investors to suspect the world's largest economy may be losing momentum.
Twenty-two of 26 economists surveyed by Bloomberg News last week said the bank will refrain from raising rates again until the third or fourth quarter of 2007, as inflation slows and political pressure mounts before the election.
Mizuno said consumer prices will keep rising moderately and the bank doesn't need to change its long-term outlook because of cheaper oil. He said it may take longer for prices to rise at the bank's projected 0.3 percent pace in the year ending March 31 and 0.5 percent next fiscal year as the benefits of corporate-sector strength are filtering to households more slowly than expected.
Core consumer prices, which exclude fresh food, were unchanged from a year earlier, according to the median estimate of 38 economists surveyed by Bloomberg News. The Cabinet Office will release the figures on March 2 at 8:30 a.m. in Tokyo.
``The bank stands ready to continue raising interest rates even if the latest CPI data are soft, as long as economic growth remains at or above trend and the labor market continues to tighten,'' said Julian Jessop, chief international economist at Capital Economics in London.
Last Updated: February 28, 2007 02:58 EST
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