20000201

BOJ says stays the course on monetary policy

TOKYO: The Bank of Japan will stick to its policy of driving short-term interest rates to near zero while watching out for adverse effects from the strong yen, BOJ Governor Masaru Hayami said on Monday.

Addressing a regular meeting of the central bank's branch managers, Hayami showed the BOJ stuck between his desire to nudge rates up a bit as soon as conditions warrant and government pressure to maintain, or even loosen, monetary policy.

"It is appropriate for the BOJ to maintain its zero interest-rate policy, since Japan's economy has not reached a situation in which deflationary concerns have been dispelled," Hayami said. The Japanese economy was "turning toward improvement", helped by rising industrial output and exports, but there are still no signs of a self-sustaining recovery in private-sector demand, he said.

Hayami added that corporate profits are up but companies continue to feel burdened with excess capacity and payrolls, while household income conditions remain severe.

KEEPING VIGIL ON STRONG YEN

Hayami's statement on the economy matched the bank's assessment in its latest monthly report. He also reiterated that he had elicited the understanding of Japan's Group of Seven counterparts on monetary policy at a January 22 meeting.

Hayami told his branch managers the bank must keep a close watch on the effects of the yen's rise on the economy and on prices.

A strong Japanese currency erodes the yen value of Japanese companies' overseas earnings and exacerbates deflationary pressure on the economy. The BOJ says it will keep rates at zero until deflation concerns abate.

At the Tokyo meeting of G7 finance ministers and central bankers, Japan won a statement of renewed concern about the possible effect of the yen's rise on the Japanese and world economies.

In return, the BOJ had to promise anew that it will keep interest rates at zero -- where they have been for almost a year -- to support the world's second biggest economy as it crawls out of its worst postwar downturn.

BOJ REBUFFS PRESSURE FOR FURTHER EASING

Hayami has openly chafed at the zero interest rate policy, which he brands "abnormal" and which he says is generating adverse side-effects. But his G7 promise soothed an edgy Japanese government bond market by bolstering the view that the BOJ cannot tighten any time soon.

Some in government, however, want the BOJ to ease further, such as increasing the flood of liquidity it already pumps into the money market in order to expand the money supply and weaken the yen.

A ruling party panel has turned up the pressure a notch by starting to consider the idea of targeting a positive inflation rate -- a scheme the BOJ has repeatedly rejected.

But for the moment, the bond market is dismissing such political pressure as an electioneering ploy, said Chotaro Morita, fixed income strategist at Nikko Salomon Smith Barney.

Prime Minister Keizo Obuchi must call general elections by October and ruling party officials have said they want to wait until after July's Group of Eight summit.

But speculation has mounted of an early election as opposition parties have launched a boycott of all parliamentary debate after Obuchi's coalition last week rammed through the Lower House a bill to cut the number of seats in parliament. -Reuters