September 12, 2007 / 1:14 AM / in 12 years

Japan PM's departure adds to rates uncertainty

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe abruptly decided on Wednesday to quit, complicating the policy outlook for the Bank of Japan and reinforcing doubts it can raise interest rates anytime soon.

Analysts said increased political uncertainty would only add to concerns that had already been seen as forcing the BOJ to put off planned rate increases, such as the economic impact of the U.S. subprime mortgage mess and weak Japanese GDP.

“The view that the BOJ will be unable to move for a while is now reinforced also by a domestic political factor,” said Yasunari Ueno, chief market economist at Mizuho Securities.

The news of Abe’s resignation prompted the yen to dip and hit Japanese stocks. The dollar rose slightly to around 114.30 yen on the news, but retreated below 114 yen by 0900 GMT. The Nikkei stock average ended down 0.5 percent.

Market players were keen to see if Abe’s successor resumed the push for market-oriented reforms started by the previous prime minister, Junichiro Koizumi, or yielded to political pressure to slow down efforts to cut Japan’s huge debt.

“(Abe’s) successor will have to take over the difficult task of balancing fiscal consolidation and efforts to revive regional economies, while changing the tax system is an option that is very difficult to take,” said Takeshi Minami, chief economist, Norinchukin Research Institute.

The opposition parties stripped the ruling block of its majority in the upper house in an election in July by appealing to voters who felt left behind by Abe’s pro-growth policies.

Many analysts said they expected the ruling Liberal Democratic Party to select its secretary-general, Taro Aso, as Abe’s successor.

“Aso’s likely to easily secure the party’s leadership, as he clearly reflects the current party sentiment that it is the LDP’s failure to pay attention to the increasing urban-rural gap in the economic recovery that was behind the poor upper house election result,” Glenn Maguire, chief economist at Societe Generale, wrote in a report.

Cabinet members said the government must keep working to sustain the economic recovery. Finance Minister Fukushiro Nukaga said the country must avoid a political vacuum, and Economics Minister Hiroko Ota said Japan should continue to pursue reforms.

BOJ TO SIT TIGHT FOR A WHILE

Although some positive economic data came out on Wednesday, the prevailing view is that the BOJ is now unlikely to move for some time.

The corporate goods price index, which tracks trends in wholesale prices, rose 1.9 percent in August from a year earlier, just topping economists’ median forecast for a 1.8 percent rise but the slowest pace of growth in six months.

Wholesale prices have been rising steadily, partly on high raw material prices. But the upward pressure has not spread to consumer prices, which have fallen slightly in recent months as firms remain reluctant to pass on higher costs to consumers.

The BOJ has said it expected consumer prices to start picking up later this year and said it would raise rates gradually, as part of a push to get Japan’s low rates back to more normal levels.

But the view is now spreading that there will be no more rate hikes this year, let alone at the central bank’s policy board meeting next Wednesday — the day the ruling party is expected to pick its new leader.

Swap contracts on the central bank’s overnight call rate currently 0.5 percent, suggest only a 10 percent chance of a BOJ rate rise this month, while the chance of a December lift remained around 35 percent.

Government data also showed that the current account surplus hit a record high for July, up 4.5 percent from a year earlier, as a rising income surplus offset a shrinking trade surplus.

Separate data showed that consumer confidence among households fell to the worst level since December 2004.

The BOJ left the overnight call rate target unchanged at 0.5 percent in August in light of the credit squeeze sparked by jitters over the subprime problems. Its next policy decision comes on September 19, just after the U.S. Federal Reserve meets.

$1=114.17 Yen

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