Following a worldwide plunge in stock markets, analysts believe the Bank of Japan (BoJ) may be forced to delay scrapping its zero interest rate policy in order to give the economy more room to recover.
Key to the outlook for monetary policy here will be whether Japan shows signs of being hit by an expected cooling of the US engine of economic growth as interest rates rise there to keep a lid on inflation, they said.
The Tokyo Stock Exchange's benchmark Nikkei-225 index tumbled 1,038.47 points or 6.58 percent to 14,750.84 last week in tandem with other global markets, nosediving over 3 percent on Thursday alone.
Japan's Economic and Fiscal Policy Minister Kaoru Yosano said a collapse in the stock market won't happen because the country is on a course for the longest economic expansion since the end of World War II.
``Stock prices are a mirror of the Japanese economy,'' Yosano said yesterday on Asahi TV's Sunday Project program. ``Looking at the growth rate, jobless rate, investment and consumer spending, there are no figures that show the Japanese economy is deteriorating. Rather, a common view is the economy will stay in good shape.''
As Nikkei crashed below 15,000 points for the first time for six months on fears that higher US interest rates will slam the brakes on global economic growth, the government urged the central bank to delay raising interest rates.
"We hope the Bank of Japan will support the economy with its monetary policies," Chief Cabinet Secretary Shinzo Abe told reporters. "We want the bank to do so by continuing with the zero interest rate policy."
Like many analysts, Dai-ichi Life Research Institute economist Hideo Kumano said the central bank would have to carefully weigh its next move.
"Given the sharp drop in stock markets, the Bank of Japan may have to be more cautious in its decision on when to lift the zero interest rate policy," Kumano said.
Market participants had speculated BoJ would lift its zero interest policy as early as next month but some are now rethinking that view, although many are still betting on a hike next month.
"The signal has now turned to amber [caution]," said Satoru Ogasawara, a strategist at Credit Suisse. "The BoJ has to diagnose whether the current declines in equities really reflect the outlook of a slowing world economy, or if they are only the result of position adjustment by investors."
He sees a 50 percent chance of an end to zero interest rates next month.
The recent rout in global stock markets has been sparked by worries over US inflation and slowing growth triggered by remarks from US Federal Reserve Chairman Ben Bernanke and his colleagues suggesting a hard line on inflation, dealers said.
"If the Fed has to continue hiking interest rates, while it sees a clear and present risk of a major deceleration in US economic growth, the BoJ may hesitate in following suit, because that could jeopardize the recovery of the Japanese economy," Daiwa Securities SMBC analyst Seiji Shiraishi said.
BoJ Deputy Governor Kazumasa Iwata last week dismissed concerns about falling stock markets, saying: "As investors' position adjustments calm down, the stock and bond markets will recover stability."
He also indicated that the bank would continue to move toward an end to its zero interest rate policy despite the stock market plunge.
However, some officials and investors are worried the BOJ could repeat its blunder of August 2000 when it lifted its zero interest rate policy too soon and helped snuff out a nascent recovery.
"The BoJ has a bad record of wrongly lifting its zero-interest policy in 2000 despite declines in stocks by focusing too much on economic fundamentals and ignoring fluctuations in stock prices," Kumano said.
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