BOJ wary of risking Japan recovery via rate hike

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Reuter / Yoshiko Mori

Mar 25, 1997, 3:00:00 AM3/25/97

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<H1><CLARI-ITEM HEADLINE>BOJ wary of risking Japan recovery via rate hike</CLARI-ITEM></H1>
<I><B><CLARI-ITEM COPYRIGHT>Copyright 1997 by Reuters</CLARI-ITEM></B></I> / <I><CLARI-ITEM DATE>Tue, 25 Mar 1997 4:24:03 PST</CLARI-ITEM></I><P>
<P> TOKYO, March 25 (Reuter) - Bank of Japan (BOJ) officials
hinted on Tuesday that the central bank is content with
maintaining its easy credit rather than putting the nation's
embryonic economic recovery at risk by a premature tightening.</P>
<P> Japan's market interest rates have risen in the past few
days on speculation that the BOJ may pronounce an end to its
credit easing, which began in July 1991, by the middle of the
<P> But policymakers on Tuesday indicated that it was not ready
to venture a policy move, at least for now.</P>
<P> A senior BOJ official told Reuters that the risk of
inflation in Japan is small compared with that of the nation's
economy getting off a firm, self-sustainable recovery path.</P>
<P> ``If we weigh inflationary risks and the risk of a fiscal
drag undermining the potential for a self-sustainable economic
recovery, the latter would be greater,'' he said.</P>
<P> The official said that although the potential was high for
Japan to achieve a self-sustainable recovery, it was not
<P> The central bank reflects this observation in its current
monetary policy, he added.</P>
<P> Some private economists estimate that a higher sales tax
burden beginning in April, together with the abolition of a
special income tax cut and an increase in social security
payments, will drag down the economy by more than one
percentage point this year.</P>
<P> The continuation of the recovery will depend on whether
private sector demand will accelerate enough to overcome these
fiscal drags, another government official said.</P>
<P> ``The next policy move would be in late May at the earliest,
but even then the central bank is unlikely to raise the
official discount rate (ODR), but may just nudge up the key
call rate, possibly by 25 basis points,'' said Shoji Kitta,
president of Totan Research Co Ltd.</P>
<P> The BOJ could hold over the rate hike until early July when
the outcome of its quarterly ``Tankan'' corporate survey in June
will be available.</P>
<P> Economists said that the next ``Tankan'' survey due on April
2 is unlikely push the BOJ towards an early tightening, even
though the survey is expected to confirm an improvement in
business sentiment in the manufacturing sector.</P>
<P> The long wait and the reluctance to move the ODR reflect
the central bank's fear that a premature, drastic policy
change, might kill an economic recovery, Kitta said.</P>
<P> The BOJ's earlier decision to announce any changes in the
key call rate target to the market will also make it extremely
cautious in making a policy move, the second official said.</P>
<P> ``Even the smallest rise in the call rate could be taken as
an announcement and prompt an overshooting of interest rates
across the yield curve,'' he said.</P>
<P> Since September 1995, the BOJ has been managing market
liquidity to let the key call rate move below the 0.5 percent
discount rate on average.</P>
<P> Meanwhile, economic research reports have upwardly revised
Japan's growth forecast due mainly to the strong export growth
prompted by the yen's steep fall over the past year.</P>
<P> Tokio Marine recently revised its economic growth forecast
for fiscal 1997/98, starting April, to 1.8 percent from the
previous 1.3 percent.</P>
<P> ``The revision reflected strong export growth, rises in
shipment of cars, computers and machine tools and the firm
recoveries in consumption and capital investment,'' said
Yoshiichi Taguchi, strategist at Tokio Marine MC Asset
Management Co Ltd.</P>
<P> However, the first BOJ official said economic indicators
gauging the health of the service sector, which has a bigger
role than goods in Japan's overall economy, are not yet strong.</P>
<P> In contrast, indicators for manufactured goods have been
strong, but that could change due to such variables as foreign
exchange rates.</P>
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