Governor Toshihiko Fukui and his colleagues will leave the key overnight lending rate at 0.5 percent on Sept. 19, according to all 42 economists surveyed by Bloomberg News. The U.S. Federal Reserve is forecast to cut its benchmark rate from 5.25 percent the day before.
A period of political instability puts at risk the government's plan to raise revenue, cut spending, balance the budget by 2011 and beat lingering deflation. The central bank will also gauge the threat that the U.S. housing recession may spread to consumers and slow global growth.
``Japan's domestic politics provide an additional reason for the Bank of Japan to put a rate hike on hold,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, also citing concern U.S. growth may slow. He expects a rate increase in January at the earliest.
The central bank last February doubled its benchmark rate, still the lowest among major economies.
Abe, 52, resigned on Sept. 12 after failing to regain public support following his ruling party's defeat in the Upper House election in July.
The Liberal Democratic Party plans to choose a successor this month and the new party leader will become prime minister. The new leader will have to keep the economy from slumping and choose a new Bank of Japan governor in March.
`Everything's Delayed'
``Everything will be delayed, ranging from a rate hike, the appointment of a next central bank governor to economic reform,'' said Takehiro Sato, chief economist at Morgan Stanley Securities Japan Ltd. in Tokyo.
The Japanese economy shrank at an annualized 1.2 percent pace in the second quarter as businesses cut investment and consumers spent at about half the pace of the first quarter.
Core consumer prices, which exclude fresh food and is the key measure of inflation, slid 0.1 percent in August from a year earlier, the sixth monthly decline.
``There is no inflation, GDP shrank and the overseas environment is getting more uncertain,'' said Seiji Shiraishi, chief economist at HSBC Securities Japan in Tokyo. ``All this allows the Bank of Japan to take time to decide interest-rate policy.''
Some economists are concerned that a slowdown in the U.S may curtail demand for exports, leading to more spending cuts in Japan.
Machinery Orders
Other statistics suggest the economy may pick up. Machinery orders, which indicate business spending plans in three to six months, surged 17 percent in July, three times the pace forecast by economists.
The European Central Bank last week shelved a plan to raise rates. Economists expect the Fed to lower its key rate on Sept. 18 to revive growth after the economy lost jobs in August for the first time in four years.
``Given that Fed rate cuts may continue beyond September, we must assume the chance that the Bank of Japan will raise rates this year is diminished,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. He expects a rate increase in February.
The bank will announce its policy decision on Sept. 19, probably by early afternoon. It will publish a monthly economic assessment report at 3 p.m. Fukui will speak at a press conference at 3:30 p.m.
