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Japan not ready to

TOKYO: Japan's central bank is not yet ready to pronounce an end to an era of low interest rates, despite remarks by its governor that sent shock waves rippling through financial markets, analysts said on Wednesday.

Bank of Japan governor Yasuo Matsushita said in a speech to business executives that it was natural for interest rates in Japan to rise in view of expectations of economic recovery.

Some traders sensed a subtle shift in the central bank's reflationary policy, but for many the remarks were simply an excuse for market participants to dump bonds, analysts said.

Richard Werner, chief economist at Jardine Fleming Securities' Tokyo branch, said: "Fears that the BOJ (Bank of Japan) might tighten its credit policy any time soon are entirely unfounded. The central bank is likely to maintain its aggressive reflationary stance for most of this calender year."

Matsushita said: "It is natural for interest rates to rise on the back of expectations of economic recovery."

Credit market prices dived after the remark, with a corresponding rise in yields on short-term and long-term debt. The yield on the benchmark 10-year yen bond, a long-term market interest rate, shot up to 3.195 percent from Tuesday's 3.045.

The Nikkei 225 average, the key barometer of the Tokyo stock market, ended the day down 135.35 points or 0.63 percent at 21,464.73. The dollar was hovering around 107.11 yen in late afternoon after hitting 108.00 yen in morning trade, its highest level in more than two years.

Taisuke Tanaka, a Treasury strategist at Credit Suisse Tokyo said that from the start of the day, all technical indicators were sending sell signals and the governor's remark gave a perfect excuse for traders who wanted to unload the bonds anyway to take profit on the recent rises. He added that the remarks were in line with Matsushita's recent comments.

This marked a clear contrast with its previous stance of not allowing the overnight call -- a rate on overnight loans made between banks -- to rise above 0.5 percent, he said.

In line with such a view, the weighted average of the overnight call rate, the target of the BOJ's credit control, rose to 0.53 percent on Tuesday, the highest level since September 29 last year.

But Tanaka of Credit Suisse said the call rate rise reflected an implicit warning by the BOJ against recent aggressive rises in both Japanese stocks and bonds.-Reuter