Financial thoughts

The Bank of Japan kept interest rates on hold at the first meeting chaired by Masaaki Shirakawa amid concern the economy may slip into a recession.

Shirakawa, who parliament today approved as governor, and his six colleagues left the key overnight lending rate at 0.5 percent, the central bank said in a statement in Tokyo. The decision was unanimous.

Shirakawa may want to gather more evidence before deciding whether the world's second-largest economy needs the first rate cut in seven years. Recent economic data have been mixed, with export growth and inflation accelerating as corporate sentiment fell to a four-year low and production cooled.

“The Bank of Japan will have no other choice but to keep interest rates on hold for a long time, given that economies are slumping at home and abroad,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

The yen traded at 102.47 per dollar as of 12:47 p.m. in Tokyo from 102.60 before the announcement.

Shirakawa had been deputy since March 12 and acting governor since the government failed to appoint a successor to Toshihiko Fukui a week later. Yesterday in parliament he repeated that the bank is ready to act flexibly if needed.

It's “relatively probable'' that Japan's economy will regain momentum after slowing, he said, adding that risks remain as the U.S. faces the worst credit crisis since the Great Depression and global financial markets are still volatile.

Too Much Stimulus

At the same time, he said the bank must bear in mind that providing too much stimulus to the economy in the short term could jeopardize long-term growth.

“Mr. Shirakawa is probably succeeding Mr. Fukui's slightly hawkish line, but he certainly has to be very flexible in response to changing economic conditions,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp. in Tokyo. “The economy is set for a full-fledged slowdown.''

The board meeting was held a week after the bank's Tankan survey showed confidence of major manufacturers, which have fueled the economy's longest postwar expansion, slumped to a four-year low and businesses plan to cut investment.

Companies reduced factory output for a second month in February on concern that the U.S., Japan's biggest export market, may slide into a recession.

Watanabe Rejected

Parliament's approval of Shirakawa ends the first vacancy at the head of the Bank of Japan in 80 years. The leadership void occurred after the opposition-controlled upper house rejected the government's previous two candidates last month.

The upper chamber rejected former Finance Ministry official Hiroshi Watanabe, after the main opposition Democratic Party of Japan said appointing him would amount to parachuting a former bureaucrat into a top government post, a custom it opposes.

The two rejected candidates for governor, Toshiro Muto and Koji Tanami, also worked at the Finance Ministry. Shirakawa was at the central bank for 34 years before taking up at teaching position at Kyoto University in 2006.

Shirakawa “is certainly not a charismatic person but he has a great deal of experience in monetary policy'' and will become a “steady hand at the helm,'' said John Vail, chief global strategist at Nikko Asset Management Co. “Doing nothing for the time being is the best course of action'' because interest rates are already low, Vail said.

Most economists expect the Bank of Japan to maintain a wait-and-see stance this year, according to a Bloomberg News survey. Of 30 economists surveyed, four predict a cut by December and three expect an increase. The remaining 23 said borrowing costs would stay on hold in 2008.

Still Intact

Some reports show the expansion is still intact. Export growth quickened in February as demand from emerging economies helped manufacturers ride out the U.S. slump. Wages rose for a second month, the first back-to-back gains since July 2006.

The bank also has to consider inflation that's higher than the key interest rate. Consumer prices excluding fresh food climbed 1 percent in February from a year earlier. Shirakawa has said Japan's interest rates are currently “very low.''

The central bank will publish its monthly assessment of the economy at 3 p.m. and Shirakawa will speak at a news conference at 3:30 p.m. He will leave for Washington tomorrow to attend the G-7 meeting.

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