By Jason Clenfield and Mayumi Otsuma
Aug. 28 (Bloomberg) -- The Bank of Japan will raise interest rates gradually based on developments in the economy and prices, minutes released today show.
``The bank would adjust the level of interest rates gradually in accordance with improvements in the economic and price situation,'' policy makers said at the July 11-12 meeting. Members agreed that their ``basic thinking remained unchanged.''
The bank kept the benchmark overnight lending rate at 0.5 percent at the meeting, which was held before the threat of a global credit crunch compelled central banks, including the Bank of Japan, to inject extra funds into their financial systems. The bank stood pat again on Aug. 23 after the market turmoil clouded the outlook for Japan's economic growth.
Governor Toshihiko Fukui told reporters after last week's decision that keeping borrowing costs too low may spur risky investments, suggesting the bank still plans to raise rates.
``The economy is developing much as the Bank of Japan had expected, and Japanese money markets have worked relatively well throughout the global crisis,'' said Julian Jessop, chief international economist at Capital Economics in London. ``The bank will therefore want to continue to return interest rates toward more normal and sustainable levels.''
The yen traded at 115.57 per dollar at 9:42 a.m. in Tokyo from 115.63 before the minutes were published.
Investors see a 34 percent chance policy makers will raise the key rate at the Sept. 18-19 board meeting, according to Credit Suisse Group calculations based on interest payments.
Subprime Slump
Some board members at the July meeting suggested the U.S. housing market slump might impede economic growth. Should losses on subprime mortgage investments ``seriously'' affect credit markets, damage to the Japanese and global economy ``could not be ruled out,'' they said, according to the minutes.
One member said the ``slowing of the increase in housing prices had reduced the availability of consumer credit, thus affecting consumption behavior'' in the U.S. Still, the nine members agreed that the world's largest economy would probably achieve a soft landing by the year's end.
Fukui will be watching the subprime issue ``very closely because the Japanese outlook is intrinsically linked to the global economic outlook,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``The likelihood of the Bank of Japan raising rates before the end of this year is now very slim.''
Mizuno's Dissent
One policy maker said raising interest rates last month was ``justified by economic conditions,'' the minutes show. Board member Atsushi Mizuno was the sole dissenter in July and August, proposing a rate increase at both meetings.
Mizuno is scheduled to give a speech to business executives on Aug. 30 at 10 a.m. in Kofu, near Tokyo. He will also hold a press conference later that day.
The members agreed that Japan's consumer-price inflation would probably hover around zero in the coming months but that prices are likely to rise in the long term.
Consumer prices excluding fresh food probably fell 0.l percent in July, a sixth monthly drop, according to the median estimate of 40 economists surveyed by Bloomberg News.
