Bank of Japan Leaves Interest Rates Unchanged

Posted 18 January 2007 @ 08:09 am EET     Print     Reprint     E-Mail     Comments

TOKYO (AP) - The Bank of Japan confirmed it would leave its benchmark interest rate unchanged at 0.25 percent, deciding against a rate rise in the face of intense pressure from the government. But the policy board was split, with three of the nine members voting against the decision, the central bank said in a statement.

It was the first time in almost a year that the nine members of the policy board had not been unanimous in their vote. The BoJ, which has independence in setting monetary policy, raised interest rates to 0.25 percent in July, ending its five-year policy of keeping borrowing costs effectively at zero in a bid to boost the economy.

BoJ governor Toshihiko Fukui has since warned of the dangers of continuing too long with what he sees as such extraordinary measures, arguing for a need to return to a more normal monetary policy stance. But the central bank faced calls from the government not to act too hastily for fear of derailing the economic recovery.

"The BoJ suffered from government pressure," said Toru Umemoto, chief foreign exchange strategist at Barclays Capital in Tokyo, adding it would also be hard for the central bank to raise interest rates in February. He said the central bank's decision had "weakened its credibility".

Economic and Fiscal Policy Minister Hiroko Ota had earlier urged the BoJ to leave interest rates unchanged for now. The secretary general of the ruling Liberal Democratic Party, Hidenao Nakagawa, went further, calling on the government to officially ask the central bank to delay any rate rise.

"All of a sudden, the BoJ apparently bowed to the mounting pressure from the politicians and the government," JP Morgan Securities chief economist Masaaki Kanno said. "This means that market participants will now have to pay more attention to comments from politicians going forward," he added.

Under the Bank of Japan law, the government may ask the policy board to postpone a decision on monetary policy until the following meeting, a request which board members then vote on. The yen fell in response to the decision, with the dollar trading at 120.80 yen in Tokyo afternoon trade, up from 120.58 yen ahead of the announcement. The Tokyo Stock Exchange's Nikkei-225 index of leading shares was up 130.64 points at 17,391.99 in late trade.