11 August 2006, 09:57  Bank of Japan votes unanimously to keep overnight rate unchanged

As expected, the nine members of the Bank of Japan's policy board voted unanimously to keep the overnight call rate target at 0.25 pct until their next meeting on September 7-8, the central bank said.
Last month, the Bank of Japan raised the overnight call rate target to 0.25 pct from zero -- the first increase in interest rates in six years -- amid signs that the economy is on the mend and deflation is history. In scrapping its zero-interest policy last month, the central bank said that it would keep interest rates at "very low" levels for the time being, implying that it would not rush a second increase.
Minister for Economic and Fiscal Policy Kaoru Yosano said today that he did not believe the Bank of Japan would move quickly to increase interest rates, even though the signs of deflation continued to diminish. After a two-day meeting of its policy board, the Bank of Japan said it had also decided to leave the Lombard rate, at which it lends directly to commercial banks, at 0.4 pct.
And to limit any spikes in long-term interest rates, the central bank said it would continue to purchase 1.2 trln yen-worth of long-term government bonds each month.
Most economists expect more increases in interest rates, but cannot agree on exactly when they will be imposed.
"The Bank of Japan has just entered the process of normalizing interest rates in line with the recovering economy. I would not be surprised if the second rate hike is made as early as October," said Mitsubishi Research & Consulting senior economist Tatsushi Shikano.
NLI Research Institute senior economist Taro Saito said the Bank of Japan could lift interest rates again this year, with domestic spending continuing to boost the economy and prices rising.
The government said today that the GDP deflator, which measures the degree of deflation, was down by 0.8 pct year-on-year in the April-June quarter, providing further evidence that deflation continues to ease.
The domestic demand deflator rose 0.1 pct in the April-June quarter from a year earlier, the first rise since the January-March quarter of 1998.
"If the Bank of Japan can be sure that that the US economy will not slip into a recession, it can move to hike the rate once again before the end of this year," said JP Morgan Securities chief economist Masaaki Kanno.
But Aikio Yoshino, senior economist at Societe Generale Asset Management, said he thought the next rate hike was not so close, pointing to emerging downside risk in the US.
"A slowdown in the US economy, which has so far been limited to the housing sector, is likely to broaden to include consumer spending and corporate capital investment," Yoshino said.
"As the downside risk for the US economy, which is the most worrying factor for the Bank of Japan, is beginning to emerge, the Bank of Japan may have to wait until the January-March quarter of 2007 before making a decision on the next move," he said.

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