Bank of Japan holds rates steady at 0.5%

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The Bank of Japan’s policy board elected to keep interest rates unchanged Thursday, as expected, maintaining its key overnight lending rate at 0.5%.

Governor Toshihiko Fukui and others comprising the central bank’s policy board passed the motion on a 9-0 vote, marking the first time in seven meetings the board has reached a unanimous decision. The move came less than a day after Japan’s cabinet office slashed the nation’s economic growth forecast for the fiscal year ending March 31 to 1.3% from its earlier estimate of 2%. „They are starting to realize that the income transmission mechanism within the domestic economy is not really working,” said Hiroshi Shiraishi, chief Japan economist for Lehman Brothers in Tokyo. „Wages are not rising and therefore consumption is not really increasing.”

Lehman Brothers forecasts that the Bank of Japan (BoJ) will refrain from any increase in rates until 2009. The BoJ doubled the overnight lending rate from 0.25% in February. Shiraishi said the BoJ’s October forecast of 1.8% gross domestic product growth in fiscal 2007 is looking overly optimistic, with the economy more likely to expand 1.2%, a level of growth at the low end of expectations. Third quarter GDP growth was revised to 0.4% against the preceding quarter, down from a preliminary estimate of 0.6% growth. „The near-term outlook does not look bright and we see the risk of Japan entering a recession to be on the rise,” Shiraishi said.

Japan’s trade surplus fell 12.2% to ¥797.4 billion ($7.04 billion) in November from a year earlier, its first contraction in four months, according to data released by the Ministry of Finance Thursday. (full article) (Marketwatch)

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