BOJ gets leeway as Fed pauses interest rate hikes: economist

by Yasushi Azuma

The U.S. Federal Reserve’s decision to pause rather than end its drive to raise interest rates has taken some of the pressure off the Bank of Japan, which is planning rate hikes of its own, according to analysts.

The BOJ must have breathed a sigh of relief at the latest message from the Fed because it left room for resuming rate hikes, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute Inc.

In a statement issued Tuesday, after a one-day meeting of the Federal Open Market Committee, the Fed said the extent and timing of any additional interest rate increases would depend on the outlook for economic growth and inflation.

Until the most recent FOMC meeting, the U.S. monetary authority had raised rates 17 straight times since June 2004, pushing the federal funds rate to 5.25 percent in order to fend off inflation.

If the Fed had brought a definitive end to its campaign, it would have dealt a blow to the BOJ because the end of a credit-tightening cycle by the Fed is usually a sign of narrowing interest rate differentials between Japan and the United States, said Kumano, a former BOJ official.

“Narrowing interest rate differentials trigger dollar-selling, and the BOJ dislikes a strong yen because it could hurt the economy by making the price of Japanese exports (more) expensive,” he said.

The end of a credit-tightening campaign by the Fed is usually taken negatively by the BOJ, Kumano said. “But, with the statement indicating the possibility of resuming rate hikes, the latest decision by the Fed is unlikely to prompt dollar-selling, yen-buying moves.”

BOJ Gov. Toshihiko Fukui has denied plans to raise rates repeatedly following the end of the BOJ’s “zero-interest-rate” policy on July 14.

But the central bank has expressed a desire to normalize monetary policy now that the economy is growing again. It expects the economy to continue strengthening and worries that maintaining the easy money policy too long could be harmful in the long run.

Some BOJ Policy Board members have recently warned the financial markets not to assume no more rate hikes are coming before the end of the year.

But some BOJ watchers say the central bank is not likely to raise the overnight call rate from its current 0.25 percent for a couple of months because of the Fed’s pause.

Masuhisa Kobayashi, chief Japanese government bond strategist at Barclays Capital Japan Ltd., said the Fed’s message does not mean U.S. rates are definitely headed higher, but instead reflects uncertainty on the board.

“Since the Fed did not have the confidence to declare its rate hike campaign completely over, it left room for the possibility of resuming rate hikes,” Kobayashi said.

He argued that instead of raising rates again, the Fed is likely to start lowering them.

This will not prevent the BOJ from raising rates eventually, and it should do so because the Japanese economy is expected to continue its solid growth, led by domestic demand, Kobayashi said.

“The central banks in Japan and the United States do not need to steer their monetary policies in the same direction.”

He noted the BOJ raised rates in May 1989 and did not reverse course even after the Fed began to lower interest rates in June of that year.

“The BOJ should raise the key short-term rate by assessing domestic demand conditions,” Kobayashi said.

“The BOJ can and should go its own way.”

No BOJ changes seen

The Bank of Japan started a two-day policy meeting Thursday at which analysts widely expect the BOJ to hold the unsecured overnight call money rate steady at 0.25 percent.