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Source text - English Bank of Japan provokes uproar by doing nothing The bank 's decision to leave rates alone took the financial markets by surprise, writes David Pilling.
Rarely in the history of central banking can so many observers have read so much into so little.
When the Bank of Japan concluded a two-day policy board meeting last month, it arrived at the seemingly drama-free decision of leaving interest rates precisely where they were: at 0.25 per cent. But its non-move caused uproar in the financial markets for three interconnected reasons.
First, markets - rightly or wrongly - had come to the conclusion that the BoJ had intended to raise rates a notch to 0.5 per cent. A few days before the January meeting, futures markets concluded there was an 80 per cent chance of an increase. When the bank did not move, market participants surmised that the board must have come under pressure from politicians, who want interest rates to remain low.
Second, according to some economists, the criteria by which the bank makes its decisions are becoming murkier. The BoJ has set out a forward-looking framework that allows it to raise rates in anticipation of inflation, releasing it from the shackles of historical data. However, in interpreting the -language that accompanied January's decision to hold rates, many economists detected a shift to a more backward-looking stance.
Mikihiro Matsuoka, an eco-nomist at Deutsche Bank, says: "The way they exp-lained why they didn't raise rates was not consistent with what they said in Dec-ember. We are concerned that there has been a change of logic for a rate hike and that this should be explained."
Third, the policy board was badly split in January, voting by six to three to leave rates where they were. That has cemented the impression among some observers that the decision-making criteria are opaque and being interpreted on -ideological rather than empirical grounds.
John Richards, a senior strategist at Royal Bank of Scotland in Tokyo, says: "I think the BoJ has lost considerable credibility in international circles. What people would like to see is the bank having a dialogue with the markets that makes some sense and not one thatis overridden by the gov-ernment at the last minute."
There is no hard proof that the bank came under direct pressure from the government, although Hidenao Nakagawa, the powerful -secretary-general of the -ruling Liberal Democratic party, made it clear that a rate rise would not be -welcome.
However, there was cir--c-umstantial evidence through leaks and counter-leaks to local media that some board members had changed tack at the last moment.
Toshihiko Fukui, the BoJ governor, explicitly denied succumbing to government pressure, saying after the meeting: "As always, today's decision is based on our careful assessment of the economy and prices. There is no room for factors other than economic and price conditions to wield clout over monetary policy."
Yet even some friends of the bank are puzzled. "I don't deny there was very strong political pressure," says one person close to the policy board. He agreed the bank was caught between its forward-looking stance and a desire to have published data to justify a move.
Many friends of the bank are urging it to regain the initiative this month by raising rates. It could be aided by fourth-quarter growth numbers, due to come out between now and the next meeting. Given the comparison with the very weak third quarter, many expect these to show the economy growing at an annualised rate of 3 per cent or even 4 per cent.
"If that happens and if consumption bounces, which we think it will, then Fukui can say to the politicians, 'I took you into consideration and waited until the data confirmed things'," says Mr Richards. "Then he can go ahead and tighten and restore some credibility with the global bond community."
That is all well and good, say other economists, but the justification for tightening, even if fourth-quarter growth is strong, remains thin. Consumer price inflation, stripped of energy and fresh food, is still falling. Even including energy, the headline number is a measly 0.2 per cent.
Moreover, for technical reasons related to energy prices, the headline CPI could even slip back into negative territory in the next few months. That would leave the BoJ in the potentially embarrassing position of having raised rates not once but twice, in the midst of palpable deflation.
The bank would then have proved its independence. But at what cost?
Translation - Japanese 日本銀行は何もしないことで騒動を引き起こす
- 20 years career at major securities and asset management companies in Japan
- 6 years work experience in London and Singapore as an investment advisor
- Chartered Member of Security Analysts Association of Japan
- Master of Science in Industrial Administration (Carnegie Mellon University, US)
- Bachelor of Commerce and Management (Hitotsubashi University, Japan)
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