PREVIEW-BOJ to keep rates this week, watch more data

Tue Jun 12, 2007 4:43am EDT

Related Topics

*What: Bank of Japan policy meeting

*When: June 14-15, policy decision likely around 1-2 p.m. (0400-0500 GMT) June 15

*Key overnight call rate target seen staying at 0.5 percent

By Hideyuki Sano

TOKYO, June 12 (Reuters) - The Bank of Japan is seen keeping interest rates on hold this week as it awaits more proof that the Japanese economy will keep expanding solidly and consumer prices will rise, enabling it to hike rates in months ahead.

Recent economic data has generally been solid, underscoring the financial market view that the central bank will notch up rates sometime in the July-September quarter, most likely in August.

BOJ officials have also said the economy has been growing in line with the bank's forecasts, so there is no reason to change its line on raising interest rates gradually.

Many market players take that to mean a pace of roughly one rate hike every half year or so, making August a favourite after the BOJ's last rate hike in February.

"I don't think the BOJ will have enough reasons for raising rates just yet," said Akihiko Inoue, a market analyst at Mizuho Investors Securities. "They will probably raise rates in August after seeing April-June GDP figures."

Economic data in the past month has supported the view that the economy is growing steadily, mostly in line with the BOJ's view.

A strong corporate survey last week eased concern that capital spending, a major engine of the economy, may be losing steam, while the unemployment rate hit a nine-year low of 3.8 percent in April, which may signal that a tighter job market could lead to rises in wages and push up prices.

The fall in consumer prices also eased to 0.1 percent in April from 0.3 percent in March.

Many economists -- including those at the BOJ -- think consumer prices will start rising again later this year.

Anecdotal evidence is also mounting that more companies are willing to raise prices. McDonald's Japan 2702.Q, which became a symbol of Japan's deflation debacle as it cut its hamburger prices sharply more than a decade ago, now plans to raise prices in big cities.

Some BOJ officials also said consumers may no longer feel prices are falling, as CPI falls in recent months are largely due to drops in a limited number of goods prices, such as flat TVs.

TANKAN AND ELECTION

Many BOJ officials say they want to see the bank's tankan corporate sentiment survey due out in early July to confirm that their expected economic scenario is playing out.

Some market players think the BOJ could raise rates after that.

Indeed, BOJ policy board member Atsushi Mizuno said in an interview late last month that he thought the bank could discuss a rate hike as early as July.

Mizuno, known as one of the most hawkish on the bank's nine-member board, may propose a rate hike then, but analysts say most board members are likely to want a bit more time.

"If they raise rates in July, that could give the impression they have hastened the pace of rate hikes," said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.

The BOJ scrapped its zero rate policy and raised rates to 0.25 percent last July, and then hiked them again to 0.5 percent in February.

Many market players also think the BOJ may not want to move in July, when an upper house election is due, even though the central bank says the political calendar will not affect its decision-making.

BOJ Governor Toshihiko Fukui has made it clear he won't be dropping any big hints on when the bank will move, as some other central bankers do, but his comments on the economy will be closely scrutinised at 3:30 p.m. (0630 GMT) on Friday when he holds his post-meeting news conference.

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