End of zero-rate policy nearer, BOJ head hints

Bank of Japan Gov. Masaru Hayami said Wednesday that it “would not be wrong” to conclude that the central bank will abandon its zero interest rate policy by the end of the year.

The comment is the strongest indication yet that the BOJ is moving closer to the termination of its 14-month-old policy.

In a regular news conference, Hayami pointed to several upbeat changes in the nation’s economy, such as a recent rise in corporate investment in equipment.

Responding to a reporter’s comment that market participants might interpret this as an indication that the bank plans to raise interest rates from the current level of close to zero sometime this year, Hayami said: “There are likely to be many who make such an interpretation and I don’t think that would be wrong.”

Hayami’s comments apparently reflect the bank’s desire to prepare the market for the future abandonment of the policy instead of shocking it with a sudden announcement to do so.

“I think it’s reasonable to think that moves toward recovery have begun to be seen in the corporate sector,” the BOJ chief said. “We have carried on with the zero-rate policy for a little more than a year, but I think we can say that the conditions have changed significantly.”

The central bank has repeatedly said it will continue the zero-rate policy, under which private-sector banks have been able to raise short-term funds effectively for free, until the fear of deflation is dispelled.

Now that corporate investment is picking up, the BOJ’s judgment on whether the threat of deflation is gone will hinge on private consumption, Hayami said, adding that the bank will be ready to raise rates if “it becomes clear that income conditions have bottomed out.”

Earlier in the day, the BOJ upgraded its assessment of the economy in a monthly report, emphasizing that the “improvement in Japan’s economy is becoming distinct” and that recovery “has started in some areas of private demand.”

During the nine months preceding April, the bank had said in its reports that “clear signs of a self-sustained recovery in private demand have not yet been observed.” The bank omitted the phrase this time.

But the BOJ reiterated its stance that it will take time for income conditions to improve and for private consumption to recover.

“The subdued tone of the BOJ’s assessment in the report shows the bank is trying to stress that its monetary stance is consistent with that of the Finance Ministry, as the meeting of the Group of Seven industrialized nations draws closer,” said Akio Makabe, chief economist at the Dai-Ichi Kangyo Research Institute.

On corporate sentiment, the BOJ report notes that, while businesses still believe they have excess capacity and employees, “the number of firms that take positive action, such as increasing the amount of fixed investment, is increasing gradually, especially in high-growth sectors.”

Driving the recent growth in capital investment is a trend among the nation’s businesses, especially large electronics makers, to invest in information technology in order to keep up with the global competition.

As another example of an upbeat note in the economy, the report says that public investment is picking up, as public works projects under the fiscal 1999 supplementary budget are implemented.

As for prices, the BOJ said that while import prices are rising, reflecting the increase in international commodity prices such as crude oil prices, domestic wholesale prices are flat.

The BOJ added that, in future, the upward pressure on prices will arise from the improved supply-demand balance as well as from the rise in crude oil prices. The downward pressure, meanwhile, is likely to come from a fall in machinery prices due to technological innovations, as well as from the fall in prices of imports, reflecting the past appreciation of the yen.

“On balance, overall prices are likely to remain unchanged,” the report says. “However, attention should still be paid to the downward pressure on prices stemming from weak demand.”