International | Nov 08 2006
By Chris Shaw
Bank of Japan (BoJ) Governor Fukui’s latest speech on the outlook for monetary policy may not have differed greatly from the central bank’s October Outlook Statement, but according to Morgan Stanley his comments show a willingness to take a forward looking approach with respect to future increases in interest rates.
The broker suggests Fukui’s comments mean the core CPI rate will no longer be the primary checkpoint on which future rate changes will be based, rather it will be the BoJ’s view of the future headline CPI.
Fukui included in his statement comments about taking moderate action in advance, the broker noting while these sound hawkish in terms of future rate increases and imply the bank is setting the stage for further increases, they are not so surprising given the bank’s desire to create a more stable environment for the economy and prices.
The broker also notes Fukui implied there was a difference between the BoJ’s perception of the economy and that of the market, with his stance being the market should be more aligned with the bank’s outlook.
This is something of an issue in the short-term as the latest data is suggestive of little upward pressure on the Consumer Price Index given falling oil prices, but the broker notes this is based solely on “primary perspectives” and the bank also wants to base its policy on more forward looking “secondary perspectives”.
As a result, the broker suggests it would be dangerous to assume there will be a lack of comments in coming weeks regarding future rate hikes even as the latest data is less supportive of a rate hike before the end of the year.
The broker continues to expect the next increase in rates will be in January, while it notes there is potential for the BoJ to establish a regular cycle of increasing rates three months after the bi-annual Outlook Statements. This would support interest rate increases each January and July, the effect being to stabilising market expectations and so reduce volatility.
