Banks governor says geopolitical risks to blame for slow growth and declie in share price
The Bank of Japan will adjust interest rates gradually, taking into account developments in the economy and prices, the bank's deputy governor Toshiro Muto, has stated.
"We will closely examine the state of the economy and prices and adjust interest-rate levels at a gradual pace," said Muto at a recent meeting with business executives in Tokyo.
The central bank will probably keep rates at very low levels for the time being as long as the economy and prices continue to move in line with its forecast made in April, he said.
The Bank of Japan raised interest rates for the first time in almost six years on 14 July, forecasting sustained growth in the world's second-largest economy and an end to a decade of deflation.
However, on the same day, the bank's governor Toshihiko Fukui said it did not plan to raise rates consecutively.
Along with Fukui, Muto sent a clear signal the Bank of Japan was not in a hurry to increase borrowing costs, said Masuhisa Kobayashi, chief bond strategist at Barclays Captial.
He added: "The central bank will probably raise rates just once more this fiscal year, between January and March."
Japan's core consumer prices, which exclude fresh food and are the bank's preferred gauge of inflation, are expected to stay positive even after the government has revised the method of compiling the consumer price index late on in July, Muto said.
Economists say the revision will probably push core prices down by as much as 0.3%.
Corporate investment has not become excessive and land and stock prices are not in the state of a "bubble", he added.
Japanese government notes rose after Muto's speech, pushing five-year yields to the lowest in more than a month. The yield on the 1.5% note maturing in June 2011 fell one-and-a-half basis points to 1.3%.
Muto commented that it was "totally a misunderstanding" to interpret a "forward-looking policy" - a phrase the bank uses to describe its stance - as referring to early rate increases.
Yasunari Ueno, chief market economist at Mizuho Securities, said: "Muto's remarks indicate the Bank of Japan wants to play down expectations for early and consecutive rate increases."
The central bank in its April semi-annual report predicted the economy would grow 2.4% in the year ending 31 March and 2% the following year. While core prices will probably rise 0.6% this year and 0.8% the next, it said.
Muto said the Bank of Japan's forecast reflected expectations of companies and investors for future changes in interest rates and accounted for the possibility that borrowing costs may need to be adjusted to achieve predicted economic growth and prices.
Japan's real interest rates - those that take inflation into account - are still negative even after the recent rate increase and indicate the central bank's stance remains "accommodative", he said.
Stock prices have declined since May as investors reassess global economic and inflationary risks and there is "some uncertainty" over whether the US and other economies can contain inflation and keep expanding, Muto said.
Still, he added, the central bank does not consider lower share prices to be a sign that the global economy's fundamental condition has worsened.
The Nikkei 225 Stock Average fell 1.7% on the day the central bank raised rates (14 July), mainly based on concerns fighting between Israel and Lebanon-based Hezbollah militia units would keep energy prices high, slowing global growth and prompting investors to move funds into fixed-income assets.
Fukui declared that geopolitical risks are also the reason for the recent decline in share prices and the bank does not consider the stock market to be very volatile.
Bank of Japan raises rates for the first time in six years to 0.25%
Expectations are that rates will be kept low for the time being
Japanese economy remains healthy
Economy predicted to grow by 2%
‘Promising lead’ or ‘Back to the lab’?
PA360 2019 revisited
Complaints triple in past year
Our weekly heads-up for advisers
A more volatile investment environment can prompt a sharper focus on diversification as a way to manage risk and renewed interest in different approaches to multi-asset investing and fund choices.