Fukui's comment seen as signalling hike next month
Mr Fukui: The Bank of Japan will not be influenced by the actions of its counterparts elsewhere in deciding when to raise rates. If the BOJ waits for all the conditions to be right, it could be too late to make a move, he says THE Bank of Japan held off raising interest rates yesterday in the wake of the turmoil that swept through global financial markets last week. But BOJ governor Toshihiko Fukui showed his frustration at being forced by outside events to stay his hand and declared that 'it may be too late' if the central bank waits much longer to raise rates. Markets took this as a signal that the BOJ will raise rates next month.
The issue has become critical because trillions of yen worth of speculative 'carry trades' involving the shorting of the yen against other currencies have already been unwound since last week, adding to volatile swings in global exchange rates. A further hike in rates next month by the BOJ could set off a further round of turbulence as yields on the yen rise, some analysts believe.
For the moment, markets have calmed down as central banks pour liquidity into the system to stave off another credit crunch of the kind that hit markets last week, threatening to topple shaky financial institutions and to cause payments systems to seize up. The BOJ wants to raise rates just when other leading central banks are looking to lower them, in a continuing effort to calm markets.
After the BOJ's nine-member Policy Board decided yesterday on an 8-to-1 majority to preserve the bank's overnight lending rate at 0.5 per cent for now, Mr Fukui insisted at a briefing that the central bank would not be influenced by the actions of its counterparts elsewhere in deciding when to raise rates. If the BOJ waits for all the conditions to be right it could be too late to make a move, he protested.
Tokyo stock prices soared after the BOJ's decision yesterday, with the benchmark Nikkei 225 average rising by 415.68 points or 2.6 per cent to 16,316.32, while the broader Topix index jumped by 3 per cent to 1,591.81. The market was relieved that a rate rise, which could have sent the yen higher, thus damaging Japan's export prospects and corporate profitability, had been delayed.
Foreign exchange market dealers, meanwhile, detected some evidence of carry trade activity resuming as the yen declined by 0.5 per cent against the dollar to 115.94, and also eased against the euro and other major currencies. Central bank liquidity injections may be masking further problems in the international financial system and lulling carry trade investors into a false sense of security, some analysts suggested.
'There are apparently moves among some overseas players that seem to be a slight rebuilding of yen carry trades,' Yuji Matsuura, joint general manager for Aozora Bank's foreign exchange and derivatives trading group in Tokyo, told Reuters. 'But it is not as if conditions have recovered completely,' he added.
Adding to Mr Fukui's frustration at having to hold rates steady for six months was the fact that the central bank had appeared finally free this month of political pressure from the ruling Liberal Democratic Party to avoid raising rates in the run-up to last month's upper house parliamentary election (in which the LDP lost heavily).
Markets had expected to see a further 0.25 per cent hike in the BOJ's policy lending rate this month - until last week's financial crisis. Central banks, including the BOJ, were forced to make fresh liquidity injections, but Mr Fukui warned yesterday that continued monetary laxity could over-stimulate the economy and the nation's financial system.
The Bank of Japan, meanwhile, left its assessment of the economy unchanged in a monthly report issued yesterday, saying that it was expanding moderately.
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