Bank of Japan holds rates, says economy signs seen mixed

Tokyo, Jan 18 | Updated: Jan 19 2007, 05:30am hrs
The Bank of Japan kept interest rates steady on Thursday, sending the yen to almost a four-year low and sparking speculation the BOJ had succumbed to government pressure to hold off on a rate rise. The BOJ said its board voted 6-3 in favour of keeping rates at 0.25% - the lowest in the developed world - and the market was now eyeing the chance of a rate rise as early as next month.

As the market swirled with talk of possible government influence, BOJ Governor Toshihiko Fukui responded by saying the central bank had made its own decision.

Speculation is speculation. As always, todays decision is based on our careful assessment of the economy and prices ... There is no room for factors other than economic and price conditions to wield clout over monetary policy, Fukui told a news conference.

Fukui said the BOJ judged it prudent to watch more data given that indicators had been mixed. He added that consumption was in a rising trend but the pace was only moderate.

Japanese media, in the run-up to the meeting, had reported the BOJ was unlikely to raise rates. Many in the market suspected the government of trying to sway the central bank so that it would not potentially damage the economy with a hasty move. Prior to those reports, investors had been braced for a rise.

I think what is worst for the BOJ is that it could look as if they bowed to political pressure, said Yasunori Sone, political science professor at Keio University.

I think they made the decision because they lacked certainty about the economic recovery, Sone said. It could appear as if there had been a secret deal between the government and the BOJ.

The final board vote was the closest in over three years and showed a marked shift from the 9-0 vote at the last meeting when rates were also held steady. The yen, which has suffered as investors have dumped it in favour of higher-yielding currencies, slipped to 121.45 per dollar, its weakest since March 2003.

The BOJ has been in a quandary. The economy is experiencing its longest expansion in the postwar era. But worries remain given soft price pressures and moderate growth in consumption.