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Fri, Jun 09, 2006 - Page 10 News List

Japan Cabinet favors zero-rate policy

CAUTIOUS Spooked by the Nikkei's tumble yesterday, Shinzo Abe urged the Bank of Japan to hold off plans to raise interest rates as it might strangle the economic recovery

AP , TOKYO

The Japanese government urged the central bank to keep its zero interest-rate policy amid a tumble in Tokyo stocks yesterday to a six-month low, arguing that the country had not yet conclusively defeated deflation.

The Bank of Japan (BOJ) is scheduled to hold a policy meeting next week, and has been considering abandoning its long-time zero-rate stance in light of Japan's improving economy after more than a decade of anemic growth.

In an unusually direct comment on monetary policy by a politician, Chief Cabinet Secretary Shinzo Abe said it was premature to conclude that Japan had beaten deflation -- the downward spiraling of prices that has dragged on economic growth by eroding profits and paychecks.

Although the Bank of Japan has signaled it plans to raise interest rates in the future, government officials have periodically urged the bank to hold off so as not to strangle the country's recovery. Recent data shows that consumer prices are rising, although some indicators show lingering deflation.

"We hope that the BOJ will support the economy through maintaining its zero interest rate monetary policy," Abe said. "At this stage it's not appropriate to say when we will overcome deflation."

BOJ Deputy Governor Kazumasa Iwata denied the bank was in a hurry to raise rates in separate comments in northern Japan.

"We are definitely not accelerating the pace ... to rush an interest rate increase," Iwata said. It was not clear whether he was speaking in reaction to Abe's statement.

The comments came as Japanese stocks plunged amid concerns about the prospect of higher US interest rates, which could slow the US economy and demand for Japanese exports. The Nikkei 225 index yesterday dived 462.98 points, or 3.07 percent, to finish at 14,633.03 points -- the index's lowest close since Nov. 18.

Despite the warnings about deflation, Abe and Prime Minister Junichiro Koizumi sought to calm markets by trumpeting the country's firm economic recovery path.

"There are times when stock prices may rise or fall, and there are times when they move in conjunction with developments around the world," Koizumi said. "This is the same in any country and there is no unique impact."

Japan's economy has shown healthy growth the past year. In the first quarter, it grew at a better-than-expected 1.9 percent annual rate, marking the fifth straight quarter of expansion.

The BOJ's other deputy governor, Toshiro Muto, said earlier this week in Washington that Japan's economy should grow about 2.5 percent this year and 2 percent next year.

In March, the Bank of Japan said it was abandoning its super-easy monetary policy, in which it kept interest rates at zero and flooded the money market with excess cash.

Although the banks has promised to keep short-term rates at zero for some time, expectations for higher rates as early as this summer have pushed Japanese government bond yields sharply higher.

Many economists predict the bank could raise its key interest rate as early as summer, lifting it to 0.25 percent. Some see a further hike to 0.50 percent before the year's end.

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