16 January 2004, 12:32  Bank of Japan Will Probably Keep Rates at Zero as Prices Fall, Yen Rises

Jan. 16 (Bloomberg) -- The Bank of Japan next week will probably keep borrowing costs almost at zero to counter falling prices and protect an economic recovery from the yen's 11 percent gain against the dollar over the past year, economists said. Governor Toshihiko Fukui and his eight policy board colleagues will also maintain monthly purchases of government bonds from lenders at 1.2 trillion yen ($11.3 billion) at a two- day meeting starting Monday, said 14 of 15 economists surveyed by Bloomberg News. The central bank will announce its policy decision Tuesday, probably by early afternoon.
``To be sure, the yen's rise warrants caution, but Japanese stocks are in solid shape and the central bank isn't under pressure to pump more cash into the economy for now,'' said Seiji Shiraishi, chief market economist in Tokyo at Daiwa Securities SMBC Co., among the top five buyers of Japanese government bonds at auction. BOJ policy makers will meet as the Japanese currency has risen 1.5 percent against the dollar the past month, further threatening to erode profits of exporters such as Canon Inc. and Nissan Motor Co. Exports accounted for two-thirds of Japan's 0.3 percent third-quarter economic growth. A stronger yen makes Japanese goods more expensive overseas and reduces the value of profits when converted into the Japanese currency.
Exchange Rate
Tadashi Okamura, chief executive of Toshiba Corp., said in an interview with Bloomberg Television last week that he hopes the yen's sharp rise won't continue. Stable foreign exchange rates are ``the best for us,'' he said. The world's third-largest chipmaker predicted the yen's exchange rate would average 115 to the dollar in the second half of the fiscal year ending March 31. Nissan Motor Co. forecast a rate of 110. Most Japanese companies gave projections when they reported earnings for the six months ended Sept. 30. The Japanese currency tends to strengthen against the dollar during the approach to March 31, when most Japanese companies close their books and repatriate overseas assets into yen. The yen traded at 106.25 yen to the dollar at 9:43 a.m. in Tokyo, from 106.38 yen late Thursday in New York. The Nikkei 225 Stock Average has risen 25 percent over the past year amid prospects Japan is finally emerging from a 12-year slump. The benchmark 1.4 percent bond due in December 2013 fell 0.045 to 101.009 as of 9:43 a.m. in Tokyo, pushing its yield up half a basis point to 1.285 percent. A basis point is 0.01 percentage point.
Reserve Target
Japan sold a record 20.1 trillion yen in 2003 -- almost a quarter of annual budget spending -- as it sought to slow the yen's 11 percent rise against the dollar during the year. Fukui said Sunday in Switzerland that the central bank is ``cautiously watching'' the dollar's weakness. Though the bank will likely stand pat this month, it may pump more cash into the economy by raising its target of reserves made available to lenders from 32 trillion yen within the next three months to stem the yen's gains, 9 of the 15 economists said. The bank's board will meet on Feb. 5-6, almost the same time that finance chiefs and central bankers of the Group of Seven nations meet in Florida.
``Governor Fukui probably wants to avoid the impression that he would act only after pressure from the government and financial markets mount,'' said Takehiro Sato, an economist at Morgan Stanley Japan Ltd. The bank may pump more cash into the economy even if it realizes such a step would have a limited impact, Sato said. The bank lowered interest rates to almost zero in March 2001 and has pledged to keep them there until core consumer prices, excluding fresh food, stop falling for at least a few months and the bank is sure prices won't resume their decline. The BOJ's board predicted in October that consumer prices will fall 0.4 percent in the year ending March 31, 2004, and slip 0.3 percent the following year.
``The problem of Japan's deflation is still severe,'' Haruhiko Kuroda, an economic adviser to Prime Minister Junichiro Koizumi and former vice finance minister for international affairs, said at an economic forum Wednesday. The Japanese central bank ``still has room'' to further ease policy, Glenn Hubbard, former chairman of President George W. Bush's Council of Economic Advisers, told the same conference. The Bank of Japan next week also plans to announce measures to make it easier to purchase corporate debt to help small companies borrow funds. It announced the plan in June and has pledged to buy as much as 1 trillion yen in asset-backed securities through March 2006. The purchases have so far amounted to a quarter of the plan. Also Tuesday, the bank will release its monthly economic report at 3 p.m. and Fukui will speak at a press conference at 3:30 p.m. Minutes of the policy meeting will be published on March 2. //www.bloomberg.com

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