Bank of Japan Keeps Rates Steady

Reviewed by Takahiro MIYAO

Article:
Bank of Japan Keeps Rates Steady
BusinessWeek (9/19/2007)
http://www.businessweek.com/ap/financialnews/D8ROF6700.htm

Comments:

The Bank of Japan (BOJ) decided to keep interest rates unchanged on Wednesday, as reported in this BusinessWeek article. It was a fully anticipated move on the part of the BOJ, after the US Federal Reserve Board cut the Federal Fund rate to deal with the so-called "subprime problem" in the financial market. The BOJ could not possibly raise rates under this condition.

Still, there seems to be a certain degree of reluctance in keeping and not raising interest rates among BOJ policy committee members, because BOJ has been trying to raise rates from an "abnormally" low level, which has created a massive amount of the "yen-carry" trade, to a more normal level vis-à-vis interest rates in the global market. What is lacking among those committee members, however, is the sense of emergency in the global financial market due to the subprime problem. The fact that Japanese financial institutions seem to be less affected by this problem than their Western counterparts does not mean that the Japanese economy as a whole is safer than the US or European economies if the real crisis hits. In fact, the Tokyo stock market has been hit more severely than the NY or London markets for the past month or so.

In contrast, the sense of emergency is so apparent on the part of the Federal Reserve Board that the FF rate was cut a half-percentage point, which was a little beyond the market expectations, given inflationary pressure due to rising energy prices. Accordingly, the BOJ might make an announcement that it won’t raise rates for sometime to come, at least until the subprime problem is resolved, in other words, until confidence is regained in the global financial market.

Acknowledgment:
This review is adopted from the following blog (with its Japanese translation):
http://glocom.blog59.fc2.com/blog-date-20070920.html