Bank of Japan Holds Its Lending Rate Steady

From Staff Reports

Bank of Japan policymakers yesterday (Thursday) voted 8-1 to leave the key overnight lending rate unchanged at 0.5%. Japan's central bank last raised interest rates in February, when it lifted the overnight rate by a quarter of a percentage point.

The announcement was published on the Bank of Japan's website yesterday afternoon. Bank of Japan Governor Toshihiko Fukui said the board considered the stability of global financial markets, and chose to act independently of the central banks of the Group of Seven industrialized nations.

Lehman Brothers Holdings Inc. (LEH) Chief Japan Economist Hiroshi Shiraishi told MarketWatch that "there is still a high degree of uncertainty over the outlook for financial markets and the global economy."

Japan's economy is still being buoyed by its exports. A recession in the United States would cause Japan's exports to drop and destabilize its economy. Shiraishi thinks the Japanese central bank will stand pat at least until the first quarter of 2008.

"You have to wait at least a couple of quarters to see if the U.S. economy is going into a recession or not," he said.

Domestic economic confidence is mixed and shaky. The September "tankan" survey – a gauge of confidence among business owners – was released last week. It showed that confidence among Japan's largest manufacturers was still hovering near the two-year high established last quarter. Reportedly, those big firms are planning to boost capital spending by 8.7%, up from an earlier estimate of 7.7% in June.

However, confidence among smaller companies fell for the three consecutive months ending in September, the survey showed. Those firms plan to reduce their capital spending by 10.5%. Fukui and the central bank will have to monitor the domestic economy closely for signs of slowing in other areas.

It is the fourth straight month the bank failed to reach a unanimous decision on interest rates. While the Bank of Japan would like to achieve a sense of unanimity on its interest rate policy, board members have struggled to reach a consensus on just what the best coarse of action should be.

Some members think lifting rates could lead to income gains for Japanese households, and help to spur economic spending. Others are holding out for more favorable economic conditions.

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