Leika Kihara and Hideyuki Sano/ Reuters
Tokyo: Bank of Japan Governor Masaaki Shirakawa said that the central bank was putting equal focus on inflation and downside risks to the economy, reinforcing the view that interest rates will stay on hold at least for the rest of this year.
Fears that the Japanese economy, in the midst of its longest postwar expansion, may be slipping into a recession are being fuelled by growing concerns over the health of the US economy, which is reeling from a credit crisis and housing slump.
Shirakawa told a seminar that tightening monetary policy in response to soaring energy and raw material prices would be inappropriate as that could seriously hurt economic growth.
The central bank might need to act if rising raw material costs have a knock-on effect on overall prices and boost wages, but there are few signs of that happening for now, he said, reiterating the BOJ’s neutral stance on monetary policy.
“We are in a phase where we need to pay attention to both the economy and prices, Shirakawa said. “There’s no difference in weighting on those risks. In that sense, it is 50-50.”
Financial markets did not react much to his comments, which did little to alter the market view that the central bank will keep rates on hold at 0.5% at least this year.
Swap contracts on the overnight call rate show investors see a roughly 16% chance of a rate hike by year-end, down from about 25% a week ago.
On the other hand, few in the market see the chance of a rate cut as there is little room to slash Japan’s already-low rates.
Despite Shirakawa’s comments, economists said the BOJ’s focus appeared to be tilted more towards weakening growth after it cut its economic growth forecasts on Tuesday.
“Shirakawa is placing more stress on downside risks to the economy than rising inflation. That’s not to say the BOJ would cut interest rates. Rather, it will not raise rates probably until fiscal 2010-11,” said Seiji Shiraishi, chief economist at HSBC Securities Japan.
“He sees the current price hikes as having a negative impact on the economy. He’s also paying more attention to downside risks from the U.S. economy.”
The BOJ kept interest rates unchanged in a widely expected move on 15 July but cut its economic growth forecast for the fiscal year to next March to 1.2%, the slowest pace in six years, from 1.5% projected in April.
Reflecting soaring oil prices, the BOJ raised its core consumer inflation forecast for this fiscal year to 1.8% from a 1.1% rise forecast in April. That would be the fastest inflation in a decade, underlining the bank’s policy dilemma as it juggles the risks of slowing growth and rising global inflationary pressure.
Shirakawa said that although Japan’s inflation was low compared with that of other countries, he saw a “big change” occuring to the nation’s prices after a long period of stability.
Many central banks, including the BOJ, are focusing on whether public inflation expectations remain stable even as soaring energy and raw material costs push up prices of daily necessities, he said.
While it faces a tough balancing act, the BOJ’s task is less complicated than that of the European Central Bank or the U.S. Federal Reserve because soaring commodity prices are not feeding through into wages and other costs in Japan.
Rather, commodity costs act like a tax on Japan’s economy, dampening consumption as it recovers from a decade of deflation and cutting the contribution of net exports to gross domestic product while demand is sputtering in European and U.S. markets.
Minutes of the BOJ’s June policy meeting, released on Friday, showed some on the board had said they were focusing more on downside risks to Japan’s economy than upside risks to prices, as wage growth remained sluggish.
“Consumer inflation may stabilise later this year as energy prices peak out, but downside risks to Japan’s economy likely won’t disappear” as exports to the United States and Asia slow, said Kyohei Morita, chief economist at Barclays Capital.
“The BOJ has little choice but to place significant weight on the downside risks to the economy.”