BOJ's Mizuno Says Keeping Rates on Hold `Positive'

By Mayumi Otsuma

July 24 (Bloomberg) -- Bank of Japan board member Atsushi Mizuno said interest rates should remain on hold for now because rising commodity costs are crimping domestic demand and slowing economic growth.

``The fog hanging over Japan's economy will stick around for the time being,'' Mizuno said today in a speech to business executives in Aomori, northern Japan. ``There is a positive meaning for the central bank's board to keep policy unchanged.''

Mizuno was the only member to vote for a rate increase in July to November last year, though he dropped the call in December, saying the bank should take time to examine whether profits will keep feeding into incomes and consumption. He said today that recent data show consumer spending has weakened.

``The state of Japan's economy and prices is bad enough even for Mizuno to remain cautious,'' said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo and a former Bank of Japan official. ``His comments are another message from the central bank that they're not moving rates.''

The Bank of Japan last week cut its economic growth forecast, raised its inflation estimate and said surging commodity prices are slowing growth. There's little chance that the bank will raise its 0.5 percent benchmark rate, the lowest among major economies, this year at least, according to economists surveyed by Bloomberg this month.

Policy Limbo

``Currently, it's appropriate to implement monetary policy by putting a bit more weight on the downside risks for the economy,'' Mizuno told reporters today, adding that a rebound in growth ``may be later than the central bank predicted'' and it's ``fully possible'' that the expansion will slow next fiscal year.

Policy board members said last week that the economy would grow 1.2 percent in the period ending March 31 and expand 1.5 percent the following year.

Mizuno said it is hard to define conditions that would warrant raising interest rates. In April, the central bank shelved a policy calling for higher borrowing costs. Its most recent rate increase was in February 2007.

Mizuno, 48, said the government may soon say Japan has entered a ``mild recession.'' The consumer spending component of gross domestic product probably fell last quarter, he said. Exports fell for the first time in more than four years in June, the Finance Ministry said today.

``The Bank of Japan shouldn't have any preset direction for policy right now,'' Mizuno said. The board needs to watch the effect of rising energy and materials prices on spending by companies and consumers, as well as risks that inflationary pressures may build, he said.

Second Round

There hasn't been any sign of ``second-round'' inflation in Japan because wage growth has been ``calm,'' Mizuno said. Central banks should raise rates when they see inflation spreading throughout the economy, he said, while adding that monetary tightening would do little to ease increases in oil and commodities prices, which are the result of growing demand from emerging economies.

He also said that it's too early to determine that oil prices have peaked. Oil has fallen 16 percent since reaching a record $147.47 a barrel on July 11.

Consumer prices excluding fresh food rose 1.5 percent in May, the fastest pace in a decade, as companies passed on higher energy and commodities costs. Excluding food and energy, prices fell 0.1 percent. Wages climbed 0.8 percent in May.

Mizuno said he expects core prices to climb around 1.8 percent or 1.9 percent in June from a year earlier and accelerate to about 2.5 percent ``in the autumn.'' The government will release its June inflation report tomorrow, and economists predict core prices rose 1.9 percent.

Keep Stressing

The Bank of Japan should keep stressing that it sets policy based on the state of the economy and prices, not on what other central banks are doing, Mizuno said.

``In Japan, commodity inflation is hurting the terms of trade and squeezing corporate profits and consumption, while in the other major economies concerns about wage increases and rising inflationary expectations are relatively strong,'' he said.

The European Central Bank raised rates this month and the U.S. Federal Reserve has increased its inflation-fighting rhetoric in recent months, indicating the next move may be a rate increase.

Japan's monetary conditions remain ``generally accommodative,'' Mizuno said. ``Given the economy's potential growth rate, we must always bear in mind the side effects of maintaining the benchmark rate at 0.5 percent for a long time.''

The world's second-largest economy probably won't have a ``deep adjustment'' because companies don't have excess inventories or labor, the board member said.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net