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Japan Holds Rates Steady, Machinery Orders Fall

The Bank of Japan left its policy rate target unchanged at 0.50% on Thursday as expected, as it waits for more evidence that U.S. subprime woes will not threaten its scenario for modest growth in Japan.

The decision by the central bank's nine-member board was made by a vote of 8-1, with board member Atsushi Mizuno dissenting.

The BOJ has kept monetary policy on hold since raising the key overnight call rate target from 0.25% in February, which was the first hike since July last year.

The BOJ will release its monthly economic report later in the afternoon followed by a news conference by the central bank governor, Toshihiko Fukui.

The rate decision followed disappointing core private-sector machinery orders data released this morning. This fell slightly more than expected in August, signaling that capital spending growth will remain modest.

Core machinery orders, a highly volatile figure regarded as a leading gauge of capital spending, fell 7.7% in August from July, government data showed on Thursday. That compared with a median market forecast of a 6.0% decline and followed a 17.0% jump in July.

"Machinery orders were weaker than expected, but that is a pullback from a 17% rise in July," said Mamoru Yamazaki, chief economist at RBS Securities. "Since this month's figures were minus, you can't say this is positive for the BOJ to raise interest rates, but the trend of machinery orders itself isn't a major impediment," he said.

Firm exports and capital expenditure growth have played a key role in supporting Japan's economy, which is enjoying its longest expansion in the nation's postwar history.

Manufacturers surveyed by the Cabinet Office expect core machinery orders, which exclude those for ships and machinery at electric power firms, to rise 3.7% in July-September from the previous quarter.

The government maintained its assessment of machinery orders, saying that they are seesawing.

Separate government data showed that Japan's current account surplus rose 42.1% in August, against a median market forecast for a 49.8% expansion.

Data released by the BOJ also on Thursday showed that bank lending rose 0.6% in September from a year earlier, while Japan's most widely watched measure of money supply -- M2 plus certificates of deposit (CDs) -- grew 1.7% from a year earlier.

The BOJ has kept its benchmark rate unchanged since February, when it raised it a quarter-point from 0.25%. Markets had earlier thought a hike to 0.75% this autumn was a near certainty, given the central bank's pledge to raise rates gradually so as to restore them to more normal levels.

But that has changed dramatically since the spillover from U.S. subprime mortgage problems rocked markets and caused a credit squeeze, prompting the Federal Reserve to cut rates in September and the European Central Bank to pause in raising rates.

Many market participants expect the BOJ's next rate rise will not come until December or even early next year in light of still shaky world financial markets and slowing U.S. economic growth.

Japan is currently enjoying its longest period of expansion in the postwar era, albeit at a slower pace than during previous growth phases. The economy contracted in April-June, but economists expect it to have rebounded in July-September.