BOJ to Hold Rates amid Fed, Market Unrest

All eyes are on Governor Masaaki Shirakawa of Bank of Japan as market investors try to find clues on whether rates will be trimmed while the market remains jittery after the crumbling collapse of Lehman Brothers.

The decision of the US Federal Reserve to hold the interest rates steady led to the conclusion by some market players that the BOJ will likely follow suit.  The BOJ is expected to keep the rates steady at 0.5 percent when the rates policy meeting ends later today.

Neutral Stance on the Market

The Bank of Japan continues to take a neutral market stance.  BOJ said that they are equally concerned about the downside risks such as global growth slowdown, spiraling costs of energy, and inflationary pressures.

The BOJ stresses that its country’s monetary policy as already very accommodating.  The pronouncement led some investors to believe that a rate hike is impending rather than a cut.

The speculations were dashed however when the din of Lehman’s collapse was heard this week as another big financial institution becomes the center of attention.  The giant insurer firm, American International Group, is now headed for a major tumble.

Yasuhiro Onakado, economist of Daiwa SB Investments, said the future of the market is very difficult to determine at this moment.  The prospect for rate cuts is still high but the markets should understand that the possibility is still far ahead.  Onakado added that an increase or reduction in rate would be very difficult to predict.

Rates Decision Expected Later in the Afternoon

The two-day board meeting of the Bank of Japan is expected to announce a rate decision and policy.  The announcement could happen midday Wednesday between noon and 2 PM.  Governor Shirakawa is also expected to hold a press conference at those times and his pronouncements could stream into the wires around 4:15 PM later today.

Many analysts of the market are saying that a rate cut would not effectively salvage Japan’s economy which is on the brink of recession as the second quarter growth report showed continues shrinkage.  Fears are still high due to high energy costs, global economic slowdown, weak export, and high raw material and production costs.

The core inflation of Japan shot up to a new 10-year high or 2.4 percent in July.  This is way above the BOJ overnight rates target of 0.5 percent which kept real interest rates at the negative.

Eiji Dohke of UBS Securities said the BOJ will provide liquidity to the markets in order to overcome major market unrest. Dohke also said the interest rates will also remain as a toll for the economy.

Dohke further analyzed that the developments caused by Lehman’s downfall will not push the BOJ to move the interest rates.