BOJ Watching Rising Inflation Risks, Minutes Show (Update1)

By Mayumi Otsuma
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June 18 (Bloomberg) -- Bank of Japan policy makers agreed that global inflation risks have been ``heightening'' and the central bank must always watch prices as well as the overall economy, meeting minutes show.

``Inflation risks had been heightening worldwide given the high international commodity prices,'' the board said, according to minutes of the May 19-20 meeting released in Tokyo. A few members said the bank needs to examine how rising prices of daily necessities affect inflation expectations in Japan.

The central bank has kept interest rates at 0.5 percent since February 2007, and economists say an increase is unlikely this year as growth risks outweigh the threat from inflation. Governor Masaaki Shirakawa's board last week cut its evaluation of exports and profits as the global slowdown crimps demand and surging commodities costs squeeze margins.

``Business investment and consumer spending will keep weakening for the time being as incomes are being eroded,'' Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo, said before the minutes were published. ``There won't be any chance for a rate increase until the Bank of Japan can see signs that the domestic economy will start gathering momentum.''

The yen traded at 107.91 per dollar at 9:50 a.m. in Tokyo from 107.93 before the minutes. The yield on Japan's five-year note fell 7.5 basis points to 1.35 percent on speculation the bank will keep rates on hold this year as growth stagnates.

Costlier Raw Materials

The seven board members agreed that Japan's growth has been slowing because of rising energy and raw-materials prices and will probably keep decelerating for the time being. Shirakawa said last week that the bank must watch both the risks to growth in the world's second-largest economy as well as inflation.

Japan faces ``considerable downside risks'' because the outlook for overseas economies and global financial markets remains ``uncertain,'' the members said at the May meeting.

``Some members said that attention should be paid to the effects of the ongoing rise in the prices of daily necessities on consumers' inflation expectations and firms' price-setting behavior,'' the minutes showed.

Finance ministers from the Group of Eight nations last week singled out spiraling food and fuel prices as their chief concern for the global economy.

``Elevated commodity prices, especially of oil and food, pose a serious challenge,'' the officials said in a statement after their annual meeting in Osaka, Japan.

Faster Inflation

Inflation is accelerating worldwide and the price of oil reached an unprecedented $139.89 a barrel on June 16.

``Financial markets continue to focus on inflation and the chance for rate hikes,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``But the risk of a global economic slowdown is definitely increasing.''

Japan's core consumer prices, which exclude fresh food, climbed 0.9 percent in April from a year earlier after rising 1.2 percent in March, the fastest pace since 1998.

A report due June 27 will probably show that core prices increased around 1.5 percent in May after a gasoline tax was reinstalled in the month, according to Daiwa SMBC's Iwashita.

Even at a decade high, inflation remains within the bank's zero to 2 percent definition of price stability and is lower than in the U.S. and Europe. Core prices in the U.S. rose 2.3 percent in May from a year earlier and European inflation surged 3.7 percent in the month, the fastest pace in 16 years.

Rising oil and commodities prices support Japan's exports to resource-rich economies as well as increase the cost of imports, some members said. Both factors need to be considered when assessing the effect of raw-materials prices on the economy, they said. Japan relies on imports for virtually all of its oil.

Some members said keeping rates low for a long time could cause economic swings, according to minutes of the April 30 meeting, also released today. The bank dropped its two-year call for raising rates in its semi-annual outlook published that day.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
Last Updated: June 17, 2008 20:51 EDT