BOJ Will Probably Keep Rate at 0.5%; Economists Eye August Rise
By Mayumi Otsuma
July 10 (Bloomberg) -- The Bank of Japan will probably keep its benchmark interest rate unchanged this week as it awaits more proof that economic growth will be sustained and inflation will take hold.
Governor Toshihiko Fukui and his policy colleagues will hold the key overnight lending rate at 0.5 percent at the conclusion of a two-day meeting on July 12, according to all 43 economists surveyed by Bloomberg News. The bank last raised the rate, still the lowest among major economies, in February.
Fukui will probably postpone increasing borrowing costs for one more month so policy makers can assess the strength of economic growth in a report on gross domestic product in mid- August. The board may be reluctant to raise rates until after Upper House elections are held on July 29, though some members may propose an increase this week.
``The central bank will almost certainly leave rates on hold,'' said Julian Jessop, chief international economist at Capital Economics in London. Still, ``as many as three board members might go further and propose a hike now.''
Any dissent this week will spur expectations of an August increase because of a ``precedent'' in January, when three policy makers proposed raising rates in a move that preceded February's decision, Jessop said.
Investors yesterday saw an 80 percent chance of a rate increase in August, up from 74 percent a week earlier, according to calculations made by Bloomberg News based on the exchange of interest payments provided by Credit Suisse Group.
August Expectations
``Markets are steadily factoring in an August hike, which makes it easier for the central bank to move,'' said Teizo Taya, a former Bank of Japan board member and now adviser to the Daiwa Institute of Research.
Some reports released in the past two weeks back the central bank's prediction that the economy's longest postwar expansion will be sustained.
Confidence of major manufacturers held near a two-year high and Japan's largest companies plan to increase spending this fiscal year by 7.7 percent, the bank's Tankan survey showed on July 2. Machinery orders, a key indicator of corporate spending plans, expanded at triple the pace economists predicted for May, the government said yesterday. The jobless rate held at a nine- year low in May and household spending rose for a fifth month.
``BOJ policy makers will probably say the economy continues to develop in line with expectations'' when it reviews its half- yearly outlook on July 12, said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``If so, we must assume the bank remains committed to hiking rates every six months.''
U.S. Rebound
A rebound in growth in the U.S., which buys a fifth of Japanese exports, is also good news for the central bank. The world's largest economy probably grew an annual 2.8 percent last quarter, four times faster than the previous three months, according to Blue Chip Economic Indicators.
Other reports for May weren't so supportive. Japan's industrial production fell for a third month and consumer prices excluding fresh food slipped 0.1 percent, a fourth monthly drop.
Fukui said in May that a rate increase is possible even amid falling consumer prices, as long as the bank is confident price gains will resume and growth will be sustained. Last week he reiterated that prices will rise in the long term after hovering near zero for now.
``The Bank of Japan has declared that it will implement monetary policy in a pre-emptive manner,'' said Akio Makabe, a professor of economics at Shinshu University. ``A small core- price decline won't deter any rate-hike decision.''
Second-Quarter GDP
Japan's GDP probably slowed to an annual rate of 1 percent in the second quarter from 3.3 percent in the previous three months as exports and consumption lost momentum, according to the median estimate of 21 economists surveyed by Bloomberg News. The government will probably release the GDP data in the week before the bank's Aug. 22-23 policy meeting.
``The chance of a rate hike next month is pretty high unless the GDP numbers are negative,'' Daiwa's Taya said.
This month's election also gives an incentive for the bank to wait until August, said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Securities Japan Co.
``No central bank in the world would raise interest rates just before a national election unless there are extraordinary reasons,'' Kanno said. ``It's not a matter of a central bank's independence.''
The bank will announce its rate decision on July 12, probably by early afternoon, and publish its monthly economic assessment and a mid-term review at 3 p.m. in Tokyo. Fukui will hold a news conference at 3:30 p.m.
