Bank of Japan to Keep Rate on Hold, May Raise Economic View

By Mayumi Otsuma

May 22 (Bloomberg) -- The Bank of Japan will probably keep interest rates on hold and raise its view of the economy for the first time since July 2006 when it concludes a meeting today.

Governor Masaaki Shirakawa and his policy board will keep the key overnight lending rate at 0.1 percent, according to all 25 economists surveyed by Bloomberg News.

Shirakawa said last week that a “moderate” recovery in the world’s second-largest economy is likely as exports and production improve, indicating the central bank may be reluctant to expand its purchases of corporate and government debt. A report this week showed that gross domestic product shrank at a record 15.2 percent pace last quarter, a sign that the worst may be over for the nation’s deepest recession since 1945.

“The bank’s assessment will probably use similar language as the governor’s,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “The key question is how things develop from this point. A temporary rebound could just be a false dawn, so we need to be cautiously optimistic.”

The bank may consider adding U.S. Treasuries and other foreign currency-denominated assets to the collateral it accepts from lenders to guard against further financial-market turmoil, the Nikkei newspaper reported this week, without citing sources.

Reports in the past month suggest growth may resume this quarter. Confidence among consumers rose to a 10-month high in April. Exports increased in March from a month earlier, and factory production rose for the first time since September.

Shirakawa said last week that the bank expects the recession to “moderate gradually and the economy to start to level out towards the end of this year.” Economists anticipate the government’s 25 trillion yen ($264 billion) in stimulus measures will provide at least temporary relief.

Recession Spreading

Still, this week’s GDP report showed that even as exports and output begin to stabilize, the recession is spreading to households as companies fire staff and cut wages to stem losses.

Shirakawa told lawmakers this week that the first-quarter GDP report didn’t merit any revision to the central bank’s forecast for the economy to shrink 3.1 percent in the year ending March 2010.

The outlook for business investment and consumption remains “weak” even though the economy is showing some improving signs as companies cut inventories, the governor said.

Since the central bank cut the key rate to 0.1 percent in December, it has been buying commercial paper and corporate bonds to ease a funding squeeze for companies. It also increased its monthly government bond purchases in March.

Output Gap

“There is very little monetary policy can contribute to create demand given that Japan’s economy already has such a huge output gap,” said Chotaro Morita, chief fixed-income strategist at Barclays Capital in Tokyo. “It’s probably better for the central bank to preserve untraditional policy options for when the economy peaks and starts descending again.”

The bank will announce its policy decisions probably by early afternoon and Shirakawa will speak at a press conference at 3:30 p.m.

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