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Wednesday, September 19, 2007

No Hike in Sight at the BOJ

By Claus Vistesen Copenhagen

As Bernanke chooses to cut 50 basis points and as economic growth is visibly slowing in Europe and even contracting in Japan I don't think many of us expected the BOJ to raise rates. As such, Fukui and his colleagues duly chose to stand firm yet again yesterday as the economy contracted in Q2 2007 and remained mired in deflation. In this way it indeed seems as if Fukui is going to find it mighty difficult to end his term at the BOJ on a hawkish stance. The official decision by the BOJ can be found here (PDF!) as well as the accompanying statement from which I quote below.

Japan's economy is expanding moderately.

Public investment has been sluggish. Meanwhile, exports have continued to increase, and business fixed investment has also continued to trend upward against the background of high corporate profits. Housing investment has fallen lately. Private consumption, however, has been firm in a situation where household income has continued rising moderately. With the rise in demand both at home and abroad, production has continued to be on an increasing trend, although it has been flat most recently.

Japan's economy is expected to continue expanding moderately.

Exports are expected to continue rising against the background of the expansion of overseas economies as a whole. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to be on a downtrend.

Clearly the main narrative above is riddled with hedging and essentially a lot of word salad given the actual trend we are seeing but this I think is the normal nature of these kinds of statements. People should be clever enough to make up their own minds based on the present data. However, I do think that it would be a mistake to interpret the above as a sign that the BOJ will find space to raise rates anytime in the remainder of 2007. Of course, markets don't agree with me completely :) and thus seem to have a bit of difficulties finding their feet at the moment or at least this is the way I choose to interpret the fact that yields on Japanese notes actually rose on the back of 'bad-boy' Atsushi Mizuno's consecutive dissent in the BOJ's voting which is seen as a forward looking sign that the BOJ might just raise before the end of 2007. Clearly, the Fed decision in itself will have had something to do with this but as for the expectation of a BOJ hike in 2007; well, here is to hoping but I fear that this indeed constitutes a fools hope. For a general overview of the recent economic data and commentary on Japan you can check out the latest posts on Japan Economy Watch which almost constitutes a veritable tableau de noirceur over the recent slowdown in Japan.

If you want to get really up to date on Japan I reproduce the list of my most recent notes on Japan below ...

Japan - The Fundamentals Linger

Still Holding at the BOJ

Small Update on Japan

Is Japan Heading for a Recession? (GEM note)

Furthermore, I recommend you to stay in touch over at Japan Economy Watch where yours truly, Edward Hugh as well as Scott Peterson are always busy to keep you up to date on Japan. Lastly, I also want to endorse the excellent Japan Economy News Blog maintained by Ken Worsley which also presents a never ending stream of commentary and analysis on the Japanese economy and society. In fact, you could even say that between Worsley and the JEW team you don't even need Bloomberg, the FT etc. Ah well, that is of course for you to decide.