BOJ Will Probably Keep Rate at 0.5% as Growth Slows (Update1)

By Mayumi Otsuma


Jan. 18 (Bloomberg) --

The Bank of Japan will probably keep interest rates on hold next week and may acknowledge the economy isn't growing as fast as it has estimated.

Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent on Jan. 22, according to all 38 economists surveyed by Bloomberg News. The rate, doubled last February, is the lowest among major economies.

Japan's expansion will keep slowing ``for the time being'' and the cycle of profits feeding into wages and consumption is ``weakening,'' Fukui and his deputy Toshiro Muto said last week. Some investors anticipate a rate cut as a housing slump in the U.S., Japan's biggest export market, slows demand and costlier oil and raw materials erode profits at home.

``The chance of a rate increase in 2008 has almost disappeared, while the possibility of a cut has risen to between 30 percent and 40 percent,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

There's a 32 percent chance the bank will reduce the benchmark rate by July, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. Japanese stocks are headed for a third weekly decline on concern the U.S. economy is in a recession.

U.S. President George W. Bush will today unveil an economic stimulus proposal that may include rebates for households and tax breaks for businesses. Federal Reserve Chairman Ben S. Bernanke said yesterday fiscal stimulus would help revive the U.S. economy and reiterated more interest-rate cuts were needed.

Semiannual Outlook

Fukui's policy board will say Japan's economy is performing worse than it anticipated in a twice-yearly outlook in October, and may even cut its growth forecasts at the meeting, according to economists. The bank typically only revises the forecasts in April and October.

Japan's economy will expand 1.8 percent in the year ending March 31 and 2.1 percent in the following year, the central bank said in October. The government already lowered its growth forecast for this fiscal year to 1.3 percent from 2.1 percent after stricter building-permit rules caused housing starts to tumble to a four-decade low.

``The central bank will probably stick to the view that the economy's positive cycle is intact'' while conceding that growth is slower than it predicted three months ago, said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd. in Tokyo. ``In my view, the framework of the bank's outlook is already falling apart and warrants a big revision.''

Conditions Worsening

The central bank last month lowered its assessment of the economy for the first time in three years. Heads of its branches nationwide this week said conditions were worsening in four of Japan's nine regions as housing investment declined and small businesses struggled to pass rising costs on to clients.

Oil and food costs, rather than consumer demand, caused inflation to quicken to the fastest pace in almost a decade in November. Consumer prices excluding fresh food rose 0.4 percent from a year earlier, while wages fell for a third month.

Fukui told parliament last week that higher costs may squeeze profits and slow growth while also lifting consumer prices higher, making policy decisions difficult.

There are signs of weakening demand from abroad as well as at home. Machinery orders fell in November from a month earlier as companies pared spending in anticipation the U.S. slowdown will hurt exports. Goldman Sachs Group Inc. last week said there's a 50 percent chance of a recession in Japan, citing the risk of slower growth in emerging markets.

Most analysts still expect the bank to stick to its policy of raising borrowing costs. Nineteen of 30 economists surveyed said there is a chance of a rate increase in 2008.

Gradual Increases

Fukui reiterated last week that rates need to be lifted gradually as long as the economy expands as expected. He and other policy makers have said keeping them low for too long could encourage overinvestment and make growth unsustainable.

``A rate cut could be an option should the Japanese economy slip into recession and a deflationary spiral, but that possibility is slim,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``With the benchmark rate only at 0.5 percent, a reduction would have a very limited impact on economic growth.''

The central bank will announce its policy decision on Jan. 22 in Tokyo, probably by early afternoon. It will publish its monthly assessment of the economy and a review of the twice- yearly outlook at 3 p.m. and Fukui will speak at a news briefing at 3:30 p.m.

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As of 01/18/08 BOJ BOJ BOJ BOJ
Rates Rates Rates Rates
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Date of Release 01/22 02/15 03/07 04/09
Time period 2008 2008 2008 2008
Measure % % % %
-------------------------------------------------------
# of replies 38 34 34 34
Median Forecast 0.50% 0.50% 0.50% 0.50%
% Forecast at Median 100.0% 97.1% 97.1% 97.1%
Average Forecast 0.50% 0.49% 0.49% 0.49%
Expected change 0.00% 0.00% 0.00% 0.00%
High Forecast 0.50% 0.50% 0.50% 0.50%
Low Forecast 0.50% 0.25% 0.25% 0.25%
Previous forecast 0.50% 0.50% 0.50% 0.50%
-------------------------------------------------------
ABN Amro Sec. 0.50% 0.50% 0.50% 0.50%
Action Economics 0.50% --- --- ---
Aletti Gestielle 0.50% 0.50% 0.50% 0.50%
BNP Paribas 0.50% 0.50% 0.50% 0.50%
Bank of America 0.50% 0.50% 0.50% 0.50%
Bayerische Landesbank 0.50% 0.50% 0.50% 0.50%
CFC Seymour 0.50% 0.50% 0.50% 0.50%
Capital Economics 0.50% 0.50% 0.50% 0.50%
Credit Suisse 0.50% 0.50% 0.50% 0.50%
DBS Group 0.50% 0.50% 0.50% 0.50%
DZ Bank 0.50% 0.50% 0.50% 0.50%
Dai-Ichi Life Resrch 0.50% 0.50% 0.50% 0.50%
Daiwa Research Inst. 0.50% 0.50% 0.50% 0.50%
Daiwa Sec SMBC 0.50% 0.50% 0.50% 0.50%
Dresdner Kleinwort 0.50% --- --- ---
Fortis Bank 0.50% 0.50% 0.50% 0.50%
Goldman Sachs 0.50% 0.50% 0.50% 0.50%
HSBC 0.50% 0.50% 0.50% 0.50%
Intesa Sanpaolo 0.50% 0.50% 0.50% 0.50%
J.P. Morgan 0.50% 0.50% 0.50% 0.50%
Lehman Brothers 0.50% 0.50% 0.50% 0.50%
Lloyd's TSB 0.50% 0.50% 0.50% 0.50%
Macroecon Global Adviso 0.50% 0.50% 0.50% 0.50%
Mitsubishi UFJ Sec. BCR 0.50% 0.25% 0.25% 0.25%
Mitsubishi UFJ Sec 0.50% 0.50% 0.50% 0.50%
Mizuho Securities 0.50% 0.50% 0.50% 0.50%
Morgan Stanley 0.50% 0.50% 0.50% 0.50%
Natixis 0.50% 0.50% 0.50% 0.50%
Nikko Citigroup 0.50% 0.50% 0.50% 0.50%
Nomura Securities 0.50% 0.50% 0.50% 0.50%
Norinchukin Research 0.50% 0.50% 0.50% 0.50%
RBS Securities 0.50% 0.50% 0.50% 0.50%
Shinshu Univeristy 0.50% 0.50% 0.50% 0.50%
Stone & McCarthy 0.50% --- --- ---
Tapiola Insurance 0.50% 0.50% 0.50% 0.50%
Totan Research 0.50% 0.50% 0.50% 0.50%
UBS Securities 0.50% 0.50% 0.50% 0.50%
WestLB 0.50% --- --- ---
=======================================================

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net