Business | Economy
BoJ drops rate-hike bias in face of slow growth
Japan's central bank, facing sharply weakening growth in the economy as soaring raw materials costs bite, gave up its long-standing bias to raising rates yesterday and governor Masaaki Shirakawa warned that downside risks were likely to dominate over the next year.
- Reuters
- Published: 21:46 April 30, 2008
Tokyo: Japan's central bank, facing sharply weakening growth in the economy as soaring raw materials costs bite, gave up its long-standing bias to raising rates yesterday and governor Masaaki Shirakawa warned that downside risks were likely to dominate over the next year.
"If we look at the pros-pects for 2008-09, we are putting more emphasis on downside risks than on upside risks," Shirakawa said after a review that held Japan's key interest rate unchanged at a low 0.5 per cent, as expected.
For the first time in two years, the bank dropped from its half-yearly report on the economy its mantra of gradually "adjusting" Japan's low rates towards more normal levels.
The BoJ cut its growth outlook for the year to next March to 1.5 per cent from a previous 2.1 per cent forecast and almost tripled its inflation outlook to 1.1 per cent for the year, up from 0.4 per cent in its last half-yearly report in October.
It put the blame for downgrading in its growth outlook on booming prices for energy, food and commodities rather than the credit crunch that has hit Japanese exports to the United States.
"Given the current situation where the outlook for economic activity and prices is highly uncertain, it is not appropriate to pre-determine the direction of future monetary policy," the BoJ said in the report.
Japanese bond futures jumped almost a full point, with US consumer confidence sinking to a five-year low also a factor.
That reversed almost all the losses they suffered in a rout on Friday on views that the credit crisis was easing and central banks would soon boost rates to combat rising inflation.
"The BoJ's outlook report was as expected, and the policy bias was brought to neutral from a tightening mode. With this, any expectation for a rate hike was removed completely," said Joseph Kraft, head of capital markets in Japan for Dresdner Kleinwort.
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