BOJ Members Said Japan Recovery May Be Delayed

By Mayumi Otsuma

Oct. 10 (Bloomberg) -- Bank of Japan policy board members said last month the economy's recovery may be delayed as growing tension in global financial markets threatens exports, meeting minutes show.

While Japan's economy is likely to ``return onto a growth path,'' some members said, ``the possibility that it might do so later than expected should be borne in mind,'' according to minutes of the September 16-17 meeting released today in Tokyo.

The Federal Reserve, European Central Bank and other central banks in Europe and Asia this week lowered interest rates in an unprecedented, emergency coordinated bid to reduce fallout from the worst financial meltdown since the Great Depression. Japan's central bank didn't lower its benchmark interest rate, which at 0.5 percent is the lowest in the industrialized world.

``The BOJ was already implementing a low-rate policy prior to the coordinated rate cuts overseas,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo, who added that Japanese policy makers will focus on finding ways to ease tensions in money markets.

The Nikkei 225 Stock Average fell 9.4 percent to 8,300.87 as of 9:49 a.m., the lowest since May 2003, on concern that a deepening global financial crisis will prolong Japan's economic slump.

Governor Masaaki Shirakawa this week said the country's economic recovery will probably be delayed as financial market turmoil threatens global growth and ``downside risks'' increase. The central bank will probably be forced to cut its estimate for growth when it releases forecasts on Oct. 31.

Board members agreed Japan will recover and many said they should watch the risk that keeping interest rates low for a prolonged period may overstimulate the economy and make growth unsustainabable.

`Welcomes Move'

The Bank of Japan said in a statement after the multiple rate cuts that it ``welcomes'' the move and will enhance measures to pump more cash into the banking system. The central bank this week kept the benchmark rate unchanged at a regular board meeting.

The bank also released minutes from an emergency meeting on Sept. 18, when the policy board authorized the bank to start to supply dollars in Japan for the first time as part of joint action by central banks worldwide.

Central bankers and finance ministers of the Group of Seven industrial nations will meet in Washington today to discuss the financial market turmoil and the global economy.

The International Monetary Fund forecast this week the world's advanced economies will expand at the weakest pace since 1982 next year. The fund said it cut its estimate for Japan's growth to 0.7 percent in 2008, less than half of its July prediction, citing weakening export demand and rising costs. Growth will slow to 0.5 percent next year, it said.

``The Bank of Japan probably realizes Japan is already in a recession, but an option of rate cut isn't on the table because Japan's benchmark rate is only 0.5 percent and there is little room for maneuvering,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

A few board members said they don't expect crude oil prices to drop drastically because demand from emerging economies has been driving prices. The cost of crude oil has fallen 42 percent since reaching a record in July.

A few members said it may take some time before cheaper energy costs benefit Japan. Those members said the negative effect of lower energy costs has on exports may be stronger than any benefits in the short term. Shirakawa has said that lower oil prices may be a reflection of slowing global demand that may hurt Japan's exports.

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