Mizuno Says BOJ May Set Conditions for Raising Rates
Bank of Japan board member Atsushi Mizuno said the central bank may set preconditions for ending its policy of keeping interest rates near zero should the economy deteriorate and deflation take hold.
“It is an option to show our commitment to keep interest rates at extremely low levels should we judge that the economy and prices will get worse,” Mizuno said today in a speech in Okayama, western Japan. A sustainable recovery is “highly uncertain,” he said.
Japan’s economy emerged from its deepest postwar recession last quarter, growing for the first time in more than a year as stimulus efforts at home and abroad bolstered exports and consumer spending. Economists say attaching prerequisites for raising the key rate from 0.1 percent would help to assure investors that the central bank isn’t in a hurry.
“The BOJ is being very cautious,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo. “Instead of rushing to raise interest rates, the BOJ will be more careful.”
Japan’s central bank outlined requirements for ending a policy of keeping rates near zero in 1999 and again in 2001, saying it wouldn’t raise them until worries about deflation were dispelled. Prices are once again falling, raising concern that domestic demand will be too weak to sustain a recovery.
The yield on Japan’s 10-year bond stayed at 1.34 percent at 3:27 p.m. in Tokyo. Yields dropped to 1.335 percent yesterday, the lowest level in a month.
‘Extremely Low Level’
The economy remains at an “extremely low level” even though it has stopped worsening and production and exports are no longer in “freefall,” said Mizuno, 50, whose five-year term expires in December. While output and shipments abroad will show a “strong recovery” through the current quarter, they may lose momentum after that because demand from the U.S. and Europe remains weak, he said.
Later at a news conference, when asked whether consumer prices will keep falling in the year starting April 2011, Mizuno said declines “will ease only at a moderate pace.” A wage slump will continue to weigh on service prices, he added.
Gross domestic product rose an annualized 3.7 percent in the three months ended June 30, the first growth in five quarters. The expansion will slow in each of the ensuing four quarters as governments exhaust their more than $2 trillion in stimulus, according to analysts surveyed by Bloomberg News.
‘So Depressed’
“Growth might have resumed but the economy is so depressed that its year-over-year decline remains severe,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York low cost car insurance.
Japan’s potential growth rate is probably lower than the 1 percent the central bank indicated in April, Mizuno said. He also said GDP will probably expand at a slower pace than the 1 percent it estimated for the year starting April 1.
Speaking as Governor Masaaki Shirakawa travels to the Federal Reserve’s annual conference in Jackson Hole, Wyoming, Mizuno said the global recovery is “fragile” and can’t go on without help from governments and central banks. It will take “considerable time” for a worldwide expansion to be sustained and major central banks will have to keep rates “extremely low” for a long time, he said.
As well as cutting rates, central banks have been buying government and corporate debt to thaw credit markets that froze in the wake of the worst financial crisis since the Great Depression.
Little Room
Mizuno told reporters that the central bank has little room to prop up economic growth with its interest-rate policy.
The Bank of Japan cut the benchmark overnight lending rate to 0.1 percent in December and has since been buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. In July, the policy board extended the steps by three months to Dec. 31.
Mizuno said central banks should indicate their plans for unwinding their “extraordinary” steps “without delay” and emphasize the difference between ending those actions and raising rates to avoid misleading investors.
“It’s necessary to send signals by differentiating an exit from untraditional and temporary measures and an exit from very low interest rates,” he said.
A weak economy and deflation will prompt the Bank of Japan to keep the key rate on hold at least through 2010, according to 12 of 16 economists surveyed by Bloomberg. Consumer prices excluding fresh food tumbled a record 1.7 percent in June.
Households, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 12 months.
“It’s important to watch the risk of continuing excessively easy monetary policy, but it’s also necessary to watch out for worsening deflation,” said Yoshimasa Maruyama, an economist at Itochu Corp. in Tokyo.
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