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Bank of Japan Holds Interest Rates Steady at 0.50%

Bank of Japan left monetary policy unchanged as widely expected on Tuesday, keeping the overnight call rate target at 0.50% for two months in a row after its rate hike in February.

The bank's nine board members -- including two new members who joined the bank last week -- voted unanimously in favor of maintaining the rate.

Most investors think the two newcomers on the board, former trading house executive Hidetoshi Kamezaki and former ferry company president Seiji Nakamura, will endorse, at least for now, the BOJ's basic stance of raising rates gradually.

Nonetheless, because the two new board members' views on monetary policy are little-known, market players are keen to hear what they have to say at their news conference on Wednesday.

The two new board members were appointed to a five-year term to April 2012, replacing Toshikatsu Fukuma and Hidehiko Haru.

Market players will also examine Governor Toshihiko Fukui's comments at his news conference at 3:30 p.m. Tokyo time.

The central bank's economic outlook report due later this month is seen as vital for deciphering what the BOJ's gradual approach would mean in terms of the timing of its next policy move.

In the bank's twice-yearly report due on April 27, the board members will unveil their forecasts for Japan's economic growth and core consumer price inflation for the fiscal year that started on April 1 and the following year.

Analysts expect the report to reiterate the BOJ's long-held view that consumer price rises will gradually gain momentum in coming years.

Still, the central bank looks set to cut its price forecast given recent softness in core consumer prices.

In its last outlook report in October, the BOJ said the median forecast for core CPI among its nine board members was for rises of 0.3% in 2006/07 and 0.5% in 2007/08.

But the core consumer price index, which excludes volatile fresh food prices, slipped 0.1% in February from a year earlier, the first fall in 10 months, government data showed last month.

Although that was largely due to an easing in oil-related prices since the middle of last year, the data stirred speculation that the BOJ's next tightening could be delayed.

BOJ officials have also acknowledged in recent months that core CPI may hardly rise in the near future.

Given the absence of inflationary pressure, most investors expect the BOJ to stand pat until the July-September quarter, or possibly longer.

The BOJ's outlook report is also expected to maintain the view that Japan's current economic expansion, already the longest in its post-war history, will continue.

Earlier this week, the BOJ's quarterly tankan survey showed corporate sentiment worsened slightly in March from a two-year high in December.

While some economists are worried that Japanese corporate sentiment may have already peaked and that the economy may be hitting a soft patch, many economists think the overall data points to solid corporate activity.

Signs are also mounting that household consumption, which makes up 55% of Japan's GDP, is holding up fairly well in the January-March quarter, despite earlier expectations that it would slow down after sharp growth in the previous quarter.

Economist now think Japan's GDP growth in that quarter could top 3%, thanks to firm consumption.