Bank of Japan holds rates steady

  • Business
  • Wednesday, 19 Sep 2007

TOKYO (AP) - The Bank of Japan kept its benchmark interest rate steady Wednesday as investors in Tokyo sent Japanese stocks soaring in reaction to a bigger-than-expected cut in U.S. rates overnight. 

Japan's central bank's policy committee voted 8-1 to keep the overnight call rate at 0.5 percent, a bank official said at the end of the two-day meeting. 

Hirokata Kusaba, senior economist with Mizuho Research Institute in Tokyo, noted that the Bank of Japan wasn't likely to raise interest rates right after the Fed's rate cut.  

But he said that once global markets stabilize, the Bank of Japan is likely to resume raising rates, perhaps later this year. 

"The major concern for the Japanese economy is that a slowdown in the U.S. economy may bring down external demand,'' he said.  

"But slipping exports to the U.S. are being offset by growing exports to emerging markets and to Europe.'' 

Aiming to keep the recent credit crunch from hurting the overall U.S. economy, the Federal Reserve on Tuesday reduced its fed funds rate by a half percentage point to 4.75 percent. 

Many analysts had expected a quarter-point cut. 

Government officials and investors in Japan welcomed the Fed's move amid worries that problems in the U.S. mortgage market would trigger a slowdown in the U.S. economy, a vital export market for Japan. 

"They have reacted very quickly to the realities,'' said Kaoru Yosano, Japan's chief government spokesman, of the Fed.Asian markets rallied on news of the Fed's aggressive rate cut. 

Tokyo's benchmark Nikkei 225 index soared 3.2 percent in afternoon trading. Share prices surged in other regional markets, including Hong Kong, South Korea, Australia, Singapore and Taiwan. 

Before problems in the U.S. mortgage market sparked the recent global market turmoil, investors had anticipated the Japanese central bank to raise rates at their September meeting. But those expectations had dramatically dwindled amid the market volatility and concerns about the U.S. economy. 

The world's central banks like to show they are working together to maintain global stability, and the Bank of Japan would find it hard to raise rates at a time the U.S. is cutting them. 

Domestically, there are persistent signs of deflation, with Japan's core consumer price index falling 0.1 percent in July, the sixth straight monthly drop.  

And last week the government said the economy contracted in the April-June quarter at an annual rate of 1.2 percent, reversing its initial estimate for a 0.5 percent growth. 

The BOJ last raised interest rates in February. - AP

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