Interest rates decision poised on knife-edge

The Bank of Japan’s decision over whether or not to raise rates at a policy board meeting later this month is poised on a knife-edge, judging by comments from one of the board’s more dovish members on Thursday.

Hidehiko Haru, one of nine board members, confirmed his moderate outlook when he said in a closely scrutinised speech it was “imperative that we firmly maintain easy monetary conditions” to put “the nation’s economy on a sustainable growth path”.

But he threw a bone to hawks, adding: “We need to adjust rates gradually from their abnormally low levels.” Mr Haru is seen as one of the neutral voices on the bank’s policy board and his comments are watched closely for indications of future decisions.

He said he had not decided how he would vote at the two-day meeting starting on February 20. In January, the board split, voting 6-3 in favour of keeping rates unchanged at 0.25 per cent. That decision confused markets, which had expected a rate rise based on formal and informal briefings from bank officials.

The question of when the BoJ will raise rates has attracted international scrutiny in the lead-up to the meeting of the Group of Seven industrial nations due to open today, particularly from Europe where Japan has been accused of keeping the yen artificially low.

Hiroshi Shiraishi, economist at Lehman Brothers, said of Mr Haru’s comments: “There’s something for everyone here.” He suspected Mr Haru could be persuaded to vote for a rate increase if Toshihiko Fukui, the bank’s governor, pushed hard.

Market observers said hedge funds were no longer listening to BoJ guidance on interest rate policy after last month’s surprise decision. Days before the bank left rates on hold, futures markets had been predicting an 80 per cent chance of an increase to 0.5 per cent.

Kiichi Murashima, economist at Nikko Citigroup, said: “We cannot know what is driving the bank’s thinking. It is a terrible situation. Communication with the markets has been quite bad.”

Some economists say there is evidence the BoJ has changed from a forward-looking to a backward-looking policy framework.

According to Mr Mur-ashima, the bank should either have raised rates in January or changed its economic outlook, which suggests inflationary pressure will gradually take hold as profits feed through into higher wages and consumption. That has been slow to happen, as the bank has admitted. “If in February the bank sticks with the status quo, many people will conclude that the bank has given up its forward-looking framework,” he said.

The bank could be emboldened to raise rates if fourth-quarter growth numbers, due to be released next week, rebound strongly from a weak third quarter. Economists said the bank would look particularly at the consumption component, seeking confirmation that its central scenario for the recovery remained on track.

Mr Haru on Thursday said “the actual conditions in personal consumption are not as bad as data has indicated” largely because official numbers were affected by poor weather and delayed purchases of phones and computers ahead of the launch of new models.

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