Traders remain jittery about the possibility of an interest rate hike by the Bank of Japan as the central bank kicks off a two-day policy meeting on Tuesday, though markets are still split on the chances of a rate rise.
While strong growth figures and rises in Tokyo share prices may convince central bankers that the time is ripe for a rate hike, some at the BOJ are wary about tame price growth, keeping traders guessing if the nine-member board is ready for a policy shift.
The BOJ voted 6-3 to leave the key overnight call rate target unchanged at 0.25% last month, the closest vote in more than three years and showed a marked shift from the 9-0 vote at the December meeting when rates were also held steady.
The three members who voted against the decision called for a rate hike at the January meeting, and they will likely argue for a rate rise again. "The market is in a wait-and-see mode before the announcement, given that there's a 50-50 chance of a rate rise," said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Securities.
The board will meet from Tuesday afternoon to discuss the economy and prices before moving on to specific discussions on pros and cons of raising interest rates on Wednesday.
If the BOJ decides to raise the overnight call rate to 0.5% on Wednesday, it would bring the rate to its highest in more than a decade. But that would still be far below the 5.25% in the United States and 3.5% in the euro zone.
Government data showed last week that Japan's economic growth accelerated to an annualized 4.8% in October-December from 0.3% in the previous quarter.
The robust growth was mainly due to a recovery in personal consumption, whose softness since the middle of last year had been cited as one reason behind the BOJ's decision in December and January to hold off from raising rates.
"Using the GDP figures as a supporting factor, I think the BOJ will confirm that the economy is moving largely in line with its economic scenario," said Yasuo Goto, chief economist at Mitsubishi Research Institute, who expects a rate hike this week.
But some analysts say, and the government agrees, that the rise in personal consumption in the last three months of 2006 was merely a rebound from a drop in July-September, recovering to levels it had reached in April-June.
A Reuters survey showed on Thursday after the release of the gross domestic product data that 24 of 49 traders and analysts in Tokyo's foreign exchange and bond markets expected the BOJ to raise the overnight call target to 0.5% this week.
BOJ sources say central bankers have become more confident about the likelihood of a soft landing in the U.S. economy.
Recent rises in Japanese stocks, which on Monday saw the Nikkei average hit its highest close since May 8, 2000, are also good news. But growth in prices remains sluggish, another topic that will likely prompt a heated debate at this week's meeting.
Japan's consumer price gains have been hovering just above zero percent, and some central bankers are wary about weak wage growth. More optimistic members, however, will likely note that recent falls in oil prices are positive for the economic outlook, even though they keep pushing down consumer prices.
While data is still mixed, analysts say economic indicators are unlikely to get better in coming months, and it won't get any easier for the BOJ to justify a rate rise later. Cabinet ministers reiterated on Tuesday that monetary policy is the BOJ's prerogative.
"The economy continues to show sustainable recovery, but we would like the BOJ to support it on the monetary policy front," Finance Minister Koji Omi told a news conference.
The BOJ's policy board meeting concludes on Wednesday. The meetings normally end sometime between noon and 1 p.m. Tokyo time but when policy changes are made they have tended to last until 2 p.m.