BOJ Fukui's Bearish Words Suggest Hike Will Be Months Away

Bank of Japan Gov. Toshihiko Fukui Thursday emphasized global economic risks and unstable markets at a news conference after the BOJ's board voted once again to keep interest rates steady.

His bearish remarks suggest that a rate hike in Japan remains months away. It was the fourth consecutive month that the BOJ board voted 8-1 to keep interest rates on hold, despite their desire to gradually raise rates to around 2% from the current level of 0.50%. "We must carefully examine developments of the global economy and financial markets as they are still unstable, although the global economy is likely to keep expanding," Fukui told reporters Thursday afternoon. Before the meeting, speculation had centered on whether Atsushi Mizuno, the board's most hawkish member, would convince any colleagues that an immediate rate hike was needed. His failure to do so suggests the extent to which the BOJ is concerned about the economic fallout from the U.S. housing crisis, which wreaked havoc on global financial markets this summer. Most board members believe Japan's economy and prices are still moving in line with the bank's outlook from last April, Fukui said. But he noted that adjustments in the U.S. housing sector remain the primary factor in determining the outlook for the U.S. economy -- the main outlet for Japanese exports -- and they may take a long time to play out. "Although some improvements are seen in the U.S. and European economies since the Bank of Japan's policy board meeting last month, uncertainty still remains on the whole," he said. Analysts had wondered if the unusually long meeting meant the BOJ board was torn over a rate hike, but the tenor of Fukui's comments suggested otherwise. "If the vote had been 7-2, market participants would have started speculating about an early rate hike in October or November. Even if the results were 8-1 but Fukui had said something hawkish, hinting at a possible rate hike within this year, the market would have paid attention to it," JP Morgan chief JGB strategist Akihiko Yokoyama said. "But we didn't see anything hawkish relative to his previous press conference or his previous comments. I didn't see any step-up in terms of hawkishness." A Credit Suisse survey indicated that markets only expect a 16% chance of the BOJ lifting rates next month.

Notes Markets Still Unstable

Indeed, Fukui noted that volatility in global stock markets has lessened, but financial markets are still unstable and corporate bond spreads remain wide. "Money markets are regaining function, but borrowing costs or interest rates among banks remain at high levels," he said. "It's premature to say that the functions in money markets have recovered." As for Japan's economy, Fukui said that "long-lasting economic growth will likely continue, as a favorable cycle led by production, income and expenditure remains intact." Despite their concern over downside risks, the policymakers maintain that Japan's economy and prices continue to move in line with their April forecast of 2% growth. Fukui acknowledged that wage growth has been slow, but said CPI should turn positive soon. Board members likely will discuss whether they need to alter their view at their next meeting Oct. 31, when they'll compile a new semiannual outlook report. Many analysts feel the BOJ can't possibly raise rates while the Federal Reserve Board and European Central Bank remain concerned about liquidity. The Fed cut its federal funds rate in September to 4.75% from 5.25%, its first rate cut in more than four years, and some market players expect it to cut rates again when it meets this month. But Fukui said the BOJ would set its own course, and wouldn't bow to the wishes of other members of the Group of Seven industrialized nations, who are expected to discuss recent market instability when they meet this month. "We will determine policy based on our own view of the economy and prices," he said. Not everyone buys that. "They want to keep the door open to tighten credit, but they don't want to back themselves into a corner where they're doing it too soon," Royal Bank of Scotland strategist John Richards said. "Out of deference to the Fed and global financial insecurity, they've postponed it until markets settle down. He's saying that as long as there are serious financial strains, we don't want to add to them."