| QUOTE |
| Bank of Japan tipped to raise rates as economy snaps back by Daniel Rook Thu Jul 13, 6:10 AM ET TOKYO (AFP) - Japan's central bank looks poised to raise interest rates for the first time in almost six years in a show of confidence in the economic recovery at a key two-day meeting. An end to zero interest rates would mark the latest step by the Bank of Japan to return to a more normal monetary policy after years of emergency measures to try to revive the economy and reverse a deflationary spiral. It would also reflect a trend of rising interest rates around the world and an end to the era of cheap global credit that has allowed investors to borrow for next to nothing and plough money into fast-growing emerging economies. Many of the BoJ's nine board members believe prices have entered a positive growth trend and the central bank is likely to raise the overnight call rate by a quarter point to 0.25 percent on Friday, the Nihon Keizai business daily reported without giving its sources. Financial markets are also on tenterhooks for any clues in the BoJ's accompanying statement and subsequent comments by governor Toshihiko Fukui on how soon a second rate increase may happen. "The market is currently expecting the next rate hike (after this month) to come, at the earliest, in October ... but we do not expect anything on Friday that would reinforce this view," said Morgan Stanley economist Takehiro Sato. "The BoJ's rate hike scenario could be even weaker if the Federal Reserve's rate hike cycle winds down after the summer and clearer signs of a US economic slowdown emerge," Sato wrote in a note to clients. The pivotal meeting takes place amid lingering controversy surrounding the BoJ governor over a personal investment in a scandal-tainted fund, with a poll this week showing most Japanese wanting Fukui to resign. The government has also urged the Bank of Japan to act cautiously in tightening monetary policy, with Finance Minister Sadakazu Tanigaki repeating Wednesday his view there is no need for an interest rate rise yet. Asia's largest economy has been trapped in a deflationary spiral for almost eight years but core consumer prices rose for a seventh straight month in May with a gain of 0.6 percent. The overall economy is on track to its longest expansion since the end of World War II with annualized growth of 5.4 percent in the fourth quarter of 2005 and 3.1 percent in the first quarter of 2006. Japan's unemployment rate is at an eight-year low of 4.0 percent while the central bank's own quarterly Tankan survey of business confidence last week showed companies growing more confident and upgrading capital spending plans. However, according to a poll published by a Tokyo newspaper Thursday, 88.9 percent of small- and medium-sized companies think a rise in official borrowing costs will have a negative influence on their business prospects. Japanese share prices closed lower Thursday as investors hunkered down ahead of the central bank meeting, with the benchmark Nikkei-225 index falling 151.37 points or 0.99 percent to 15,097.95. The yen gained on expectations of an interest rate rise, which is usually positive for a country's currency because of increased investment inflows. The dollar slipped to 115.39 yen in Tokyo afternoon trade from 115.49 late Wednesday in New York. "There is a possibility of limited buying of the yen if the central bank lifts interest rates as expected," said Yosuke Hosokawa, a senior manager at Chuo Mitsui Trust and Banking Co. "But the reaction of the forex market will be limited as it has already priced in the rate move," he said. |
