BOJ May Keep Key Rate at 0.5% After $24 Billion Cash Injection

By Mayumi Otsuma

Sept. 17 (Bloomberg) -- The Bank of Japan, fresh from injecting 2.5 trillion yen ($24 billion) into the banking system, may keep interest rates unchanged today following the collapse of Lehman Brothers Holdings Inc.

Global financial markets reeled after Lehman filed for bankruptcy this week, sending Japanese stocks to a three-year low and causing the yen to surge to the highest since May against the dollar.

Governor Masaaki Shirakawa and his policy board may want more evidence that weakening global growth will derail the world's second-largest economy before deciding whether to cut its 0.5 percent interest rate, the lowest in the industrialized world. The bank will probably reiterate today that prolonging a low-rate policy could hamper the nation's prospects for sustainable growth in the long term, economists said.

``The Bank of Japan needs time to judge how much the latest shock will hurt global economic growth and affect Japan's exports,'' said Yoshimasa Maruyama, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. ``The bank's next action will still be a rate hike, but the ongoing turmoil will make the BOJ more cautious about the timing.''

Yesterday's money-market operation was the biggest since March. The Nikkei 225 Stock Average and Topix index fell to three-year lows.

Shirakawa and his policy board will keep the rate unchanged at 0.5 percent today, according to all 33 economists surveyed by Bloomberg News. Of 29 who gave predictions through June, 24 said there will be no move by then. Four estimated higher rates and one forecast a cut.

Recession

Japan is on the verge of a recession. The economy shrank an annualized 3 percent after companies cut spending in the second quarter. Exports, the main driver of the nation's longest postwar expansion, fell for the first time in three years in the period.

``A pickup of exports is a prerequisite for a shift in the central bank's policy,'' said Teizo Taya, a former central bank board member and now an adviser to Daiwa Research Institute in Tokyo. ``Given that, the timing of a rate hike will be considerably postponed.''

The bank will probably announce the decision, along with a statement explaining the reasons for its judgment, early this afternoon. Shirakawa will speak at a press conference in Tokyo at 3:30 p.m.

``Shirakawa will probably suggest flexibility but he's not going to hint at the possibility of a rate cut,'' said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo. ``This isn't a Japan-made panic. The BOJ is likely to just wait for the passing of these side effects.''

Prolonging Low Rates

Shirakawa said in speeches in August and this month that prolonging a low interest rate policy may overstimulate the economy and hamper prospects for sustainable growth in the longer term. He said last month Japan's short-term rates are ``low'' and monetary conditions are ``accommodative.''

Since the seven-member board met last month, reports showed bankruptcies soared and the ratio of jobs available to jobseekers fell to the lowest level in four years. Consumer prices excluding fresh food rose 2.4 percent, the most in a decade, outpacing wage growth.

Crude oil prices have tumbled 37 percent since exceeding $147 a barrel for the first time on July 11. Cheaper oil won't provide immediate respite, economists say.

`Slowdown Will Linger'

``It takes a while before changes in oil costs start to affecting the terms of trade and prices, and a slowdown of Japan's exports will linger,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo.

Core inflation will probably stay around 2 percent because businesses will continue to pass on costs to compensate for losses caused by fuel and material expenditures, said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo.

``The Bank of Japan, while alert against the economy's downside risks, is expected to repeat its commitment to protecting price stability,'' Kanno said. ``Financial markets may try to factor in a rate cut, but the central bank will probably try to contain such speculation if becomes excessive.''

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