OSAKA, July 7 - Bank of Japan Governor Toshihiko Fukui said on Monday that Japan's long-term interest rates were somewhat unstable, though short-term rates remained calm. "Movements in long-term interest rates are rather unstable but the short-term money market has remained overall calm, despite various risks, due to the BOJ providing ample liquidity," he said in a speech to regional business leaders in the western Japan city of Osaka.
Bullish domestic share prices, weak trends in global bonds and a disastrous 10-year auction triggered a major sell-off in bonds that peaked last week on a scale not seen since the late 1990s. The yield hit a one-year high of 1.400 percent on Friday, more than triple the record low of 0.43 percent hit less than a month ago, before retreating to 1.050 percent. Fukui said on Friday the central bank's monetary policy remained unchanged despite a rise in long-term interest rates. He also said the market was a bit unstable and needed to be monitored calmly. On Monday, the yield on the 251st 10-year bond <0#JPTSY=JBTC> rose 3.5 basis points at 1.085 percent.
Finance Minister Masajuro Shiokawa said last week that he wanted to hold a meeting with Fukui this week, raising speculation that the MOF will press the central bank to buy more government bonds. The BOJ currently buys 1.2 trillion yen ($10.17 billion) of JGBs outright per month in its money market operations. Fukui said last month that the BOJ and the government needed to work together to manage Japan's huge government debt if long-term interest rates started to rise. On domestic share prices, Fukui said there were movements of strong recovery on the back of active interest from overseas investors due to gains in U.S. and European stock markets. The stock market's key Nikkei average <.N225> rose 2.59 percent on Monday to close at a 10-month high of 9,795.16. On the economy, Fukui said uncertainties remained high but had receded somewhat as the war in Iraq ended relatively quickly, the SARS virus seemed to be contained for now, share prices were rising and the mood in the United States had brightened. He said he still expected a pickup towards the latter of the year ending next March, and saw Japan achieving growth of around one percent for the entire year. But year-on-year changes in the consumer price index would show domestic prices remaining in negative territory of around minus 0.4 to 0.5 percent. Fukui added that Japan's economic base remained fragile and vulnerable to external shocks, and the BOJ would stand ready to take further monetary policy measures should there be changes in economic and financial conditions.
"The BOJ can act quickly and flexibly, more so than the government. So we will use our advantage if conditions start to veer towards change," he said. The BOJ last expanded its current monetary easing framework -- flooding the money market with funds to keep short-term interest rates at zero -- in May by raising its liquidity target to 27-30 trillion yen from 22-27 trillion yen in the wake of a government bailout of Resona <8308.T>, the nation's fifth largest banking group, which is based in Osaka.//