The Bank of Japan policy board's lone advocate of a rate hike said on Thursday a cut in U.S. rates would change the basis of discussion, as central banks wonder how gyrating markets will affect the world economy.
The unexpectedly cautious tone from the central bank's most hawkish board member, Atsushi Mizuno, comes as Japanese retail sales figures showed their biggest annual fall in more than two years, putting another hurdle in the way of Bank of Japan plans to raise interest rates.
Calming down a panic reaction in financial markets was the most immediate task, Mizuno said in a speech to business leaders in Kofu, central Japan, adding that the U.S. Federal Reserve's cut in its discount rate earlier this month was an example of such action.
"To my eyes, there is market confusion that went beyond rational repricing (of risk)," said Mizuno, a former bond strategist and the only BOJ board member to vote for a rate rise at its last two meetings. "Nobody can tell when financial markets will calm down. But if market players' panicky actions settle down, things might head for a solution."
The comments prompted Japanese government bond futures to trim losses while the yen pulled back from its peak of the day against the dollar, although analysts said Mizuno's views had not really changed.
"Market players may have reacted a bit to his comments about rate cuts by the Fed, but his main scenario is that the U.S. economy won't decelerate dramatically and Japanese exports will be supported by steady demands from elsewhere," said Hirokata Kusaba, an economist at Mizuho Research Institute. "Mizuno is basically a hawk and confident in the economy, and he made no such comments that would alter his view today."
Analysts expect the Fed to cut its main interest rate, the Fed funds rate, next month, in a review that ends just hours before the BOJ is due to decide Japanese rates.
The BOJ is determined to raise rates from its current 0.5%, to get them back to more normal levels, but has held off in the face of a global credit squeeze that has shaken markets.
Mizuno, who has said previously that Japan's economy was solid and could cope with higher rates, said on Thursday the impact of U.S. subprime problems on the Japanese economy would be limited but there was a risk.
"The subprime problem is a risk factor, but I do not see a need to revise down forecasts for Japan's gross domestic product growth and core inflation rate," Mizuno said in Kofu, around 100 km (60 miles) west of Tokyo.
Government data on Thursday showed Japanese retail sales fell more than expected in July, casting doubt on the strength of consumer spending amid paltry wage rises and worries about the outlook for the U.S. economy.
July sales fell 2.2% from a year earlier, nearly three times the median forecast from economists for a 0.8% fall.
In seasonally adjusted terms, they fell 2.4% from June. Government officials blamed the sharp declines on an earthquake that disrupted car production and a typhoon and other wet weather that deterred people from going shopping. Clothing sales fell 9.7% from a year earlier, their biggest fall in nearly six years.
But analysts said the explanations did not change the fact that there was underlying weakness in consumption.
"Today's data suggests the weakness in consumption will raise the bar for a BOJ rate hike in the months ahead," said Kiichi Murashima, director of economic and market analysis at Nikko Citigroup.
Some economists have been also worried that an increase in local taxes in July could sap Japanese consumption, especially when wage increases have been limited.