TOKYO (Thomson Financial) - The Bank of Japan kept its overnight call rate target unchanged at 0.5 percent for the sixth straight meeting, but a stray vote by a member of the nine-man board suggested a rate hike may be imminent.
The central bank said Atsushi Mizuno voted against the proposal by governor Toshihiko Fukui to leave the overnight call rate at the current level.
Many analysts had been expecting the BoJ to put interest rates on hold but were also anticipating a split vote, though not as narrow as eight to one. Some analysts are saying that could mean a lesser chance that rates would rise as early as next month although others believe strong data may sway the BoJ to lift rates in August.
The yen weakened slightly shortly after the decision was announced, slipping to around 122.40 yen against the US dollar from 122.19 yen earlier. The yield on the 10-year Japanese government bond fell to around 1.895 percent from 1.910 percent.
Investors in the equity market were not rattled, with the benchmark Nikkei 225 index hovering around
levels were it closed after the morning session.
The overnight call rate target, or the minimum interest commercial banks charge each other for short-term needs, has now been kept steady since February, when the central bank increased it to 0.5 percent from 0.25 percent.
BoJ governor Fukui is due to hold a news conference at 3.30 pm (0630 GMT), and market players will be keeping their ears open for any indications he might give about when the next increase in interest rates will be.
Recently, the markets have been increasingly sensitive to the possibility of interest rates rising sooner than expected, because of the relatively solid consumer spending in Japan and the anti-inflation vigilance elsewhere in the world which may prod the BoJ to lift rates even though consumer prices here have been rising at a very slow pace.
Fukui has also repeatedly warned of the adverse effects of keeping interest rates low.
"To begin with, from an economic fundamentals viewpoint, the BoJ can decide to hike interest rates at any time, as it is apparently so confident about the sustained recovery that short-term fluctuations in the economic trend can be largely ignored," said Mitsuru Saito, chief economist at Tokai Tokyo Securities, referring to recent weak industrial output data.
Saito said the BoJ could lift interest rates by 25 basis points next month if the second-quarter GDP
data, due mid-August, come in strong.
"The message of today's vote is that the market should remain alert to a rate hike in August," Saito said.
Some economists think that the BoJ should wait longer, because inflation does not effectively exist in Japan and there are signs that the corporate sector's health may be at risk with industrial output
declining.
"It will not be too late if the Bank of Japan waits until it can confirm a pick-up in the corporate sector and consumer prices before making any policy call," said Susumu Kato, chief strategist at Calyon, also citing the fall in consumer confidence to its lowest level in two and a half years last month, according to government data released earlier this week.
Kato thinks that the BoJ should consider hiking interest rates around October by which time the prospect for prices and the corporate sector will become clearer.
The central bank also decided to leave the Lombard rate, at which it lends directly to commercial banks, at 0.75 percent.
And to curb any spikes in long-term interest rates, the BoJ said it would continue its monthly purchases of 1.2 trillion yen worth of long-term government bonds.
The policy board will hold its next meeting on Aug 22-23.
(1 US dollar = 122.37 yen)
yasuhiko.seki@thomson.com
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