BOJ May Signal Economic Growth Forecast Cut, Hold Rate at 0.5%

By Mayumi Otsuma

Oct. 7 (Bloomberg) -- The Bank of Japan may say today that it has become more pessimistic about the outlook for the economy as it keeps interest rates at the lowest level in the industrialized world.

Governor Masaaki Shirakawa and his colleagues may say uncertainty is increasing for the world's second-largest economy, a sign they may cut their growth forecasts in a report due Oct. 31. The deepening global financial crisis is stifling demand for Japan's exports, slowing an economy already on the verge of a recession.

Banks around the world are hoarding funds, crippling money markets in the U.S. and Europe as the crisis that brought down Lehman Brothers Holdings Inc. spreads. European Central Bank President Jean-Claude Trichet last week said his board discussed cutting interest rates, fueling speculation that central bankers in Europe, the U.S. and Japan will lower borrowing costs to shore up the global economy.

``The Bank of Japan won't be able to avoid cutting their growth forecasts,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``Even a rate cut can't be ruled out completely should central banks coordinate rate reductions to counter market turmoil.''

All 31 economists surveyed by Bloomberg News expect the benchmark overnight rate to stay at 0.5 percent today. Of 25 economists who gave predictions through June, two said the bank will cut rates and the rest expect no change.

`Very Slim'

``The chance the BOJ will lower rates independently remains very slim,'' said Akio Makabe, an economics professor at Shinshu University in Nagano, central Japan. Still, ``I see a 25 percent chance that major central banks will be forced to conduct coordinated rate cuts if financial-market turbulence intensifies.''


The bank will announce a policy decision probably by early afternoon, together with an explanatory statement. Shirakawa will speak at a press conference at 3:30 p.m.

Language in the statement will indicate whether the bank is likely to cut its growth forecasts later this month. The bank in July lowered its forecast to 1.2 percent from 1.5 percent for the year ending March 31 and predicted 1.5 percent growth for the following year.

Policy makers release forecasts for gross domestic product and inflation every three months.

The central bank will probably be ``forced to lower its headline assessment of the economy'' today, said Kyohei Morita, chief economist at Barclays Capital in Tokyo. It may use the words ``downward pressure'' or ``weak'' to describe the economy, changing from ``sluggish,'' he said.

Three Excesses

Recent data suggest Japan's companies may face the revival of three excesses of inventory, capacity and labor that weighed on growth since an asset bubble burst in the 1990s. Shirakawa said last month the absence of these problems will shelter the economy from a significant slowdown.

``The excess of facilities and labor will intensify among large manufacturers,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``The risk that the economy will undergo a deep adjustment, not just a light one, is gradually mounting.''

Industrial output fell at the fastest pace in at least five years in August as shipments declined, pushing the inventory- shipment ratio to the highest level since March 2002. The central bank's quarterly Tankan survey released last week showed fewer companies had labor shortages and large manufacturers said they had excess capacity for the first time since 2005.

`Very Accommodative'

Still, a rate cut won't be an easy option for Japan's central bank, economists say. Shirakawa and other board members have said borrowing cost are ``low'' and monetary conditions are ``very accommodative.'' They have also said the bank must consider the risk of keeping rates low for too long because it may overstimulate the economy.

Consumer prices excluding fresh food, the bank's preferred measure of inflation, rose 2.4 percent in August from a year earlier, the fastest pace in 11 years.

``Some signs of economic deterioration probably won't prompt the bank to take monetary policy action to shore up growth,'' said Teizo Taya, a former BOJ board member and now adviser of the Daiwa Institute of Research.

Economic and Fiscal Policy Minister Kaoru Yosano also said last week cutting the overnight rate ``wouldn't be effective'' because it is already low.

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