Shirakawa Says Low Rates to Stave Off `Deep' Slump

By Mayumi Otsuma

Aug. 25 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa said the country's low interest rates will help the economy avoid slipping into a ``deep'' slump.

``Japan's economy is unlikely to experience a deep adjustment phase,'' Shirakawa said at a speech in Osaka today. The country's ``accommodative environment for corporate finance is expected to continue to support business activity.''

The central bank last week described growth as ``sluggish'' for the first time in a decade, indicating it's unlikely to raise the benchmark interest rate from 0.5 percent anytime soon. The world's second-largest economy is slowing because higher prices of oil and raw materials are eroding incomes and the global slowdown is weakening exports, Shirakawa said today.

``The economy may emerge from a recession phase early next fiscal year, but the central bank won't be able to raise rates before mid-2009,'' said Hideo Kumano, chief economist at Dai- Ichi Life Research Institute, who used to work for the central bank. Kumano predicts a rate increase ``in the third quarter of next year at the earliest.''

Japan is more resilient than in previous slowdowns because companies have shed excess workers, capacity and debt, Shirakawa said. The country's financial institutions incurred ``limited'' losses from the U.S. subprime loan problem compared with their U.S. and European peers, he added.

Weak Wages

The governor said he's seen little sign of inflation spreading from fuel and food products because wage growth has been ``relatively weak.'' He said he's watching consumers' inflation expectations and how companies set prices to determine whether ``second-round effects'' of inflation will emerge.

Toyota Motor Corp., Japan's largest automaker, said today that it will raise prices on some domestic models for the first time in 16 years to pass on higher costs, paving the way for smaller rivals to do the same. Prices businesses pay for fuel and raw materials surged 7.1 percent in July, the most since the wake of the second oil crisis 27 years ago.

Consumer prices excluding fresh food probably climbed 2.3 percent in July from a year earlier, economists estimate an Aug. 29 report will show. That would be the fastest in a decade, breaching the zero to 2 percent range the bank considers represents stable prices.

``The current situation requires the Bank of Japan to carefully monitor both downside risks to economic growth and upside risks to inflation,'' Shirakawa, 58, said.

Low Rates

Shirakawa reiterated that his policy board is watching the risk that keeping rates low for a long time may overstimulate the economy should it pick up. Japan's key rate, the lowest among major economies, was last raised in February 2007.

``If the downside risks to the economy turn out to decrease, there is a risk that prolonging the period of accommodative financial conditions will lead to swings in economic activity and prices,'' he said.

Interest rates will stay unchanged through next June at least, according to 21 of 26 economists surveyed by Bloomberg this month. Four estimated higher rates and one predicted a cut.

``The chance for a rate cut is very slim,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo. ``The central bank has emphasized that the current monetary conditions are accommodative.''

The bank shelved its two-year policy of calling for rate increases in April, the month Shirakawa assumed the bank's top position.

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