TOKYO (Thomson Financial) - Bank of Japan (BoJ) governor Toshihiko Fukui gave no new hints Thursday about when the monetary authority might hike its key interest rates as he reiterated that the bank will gradually adjust rates taking into account downside risks and the upside potential for the economy.
He was speaking to reporters after the BoJ board decided earlier today to keep the overnight call rate target unchanged at 0.50 percent by a vote of 8 to 1.
"We will adjust the level of interest rates gradually in accordance with improvements in the economy and the price situation," Fukui said.
Most board members were not yet confident of making a policy shift, although one, Atsushi Mizuno, did favor a rate increase as he was "confident about prospects for the economy," the governor said.
He said the bulk of members still want to see more economic data before making a decision.
In January when three board members proposed hiking rates which resulted a month later in an increase, the governor described the opinion gap between those who proposed hiking rates and those who opted to sit pat, as slight.
This time he said it is "difficult to judge if gaps in views between Mr Mizuno and the rest of the members are narrow or wide."
Fukui, however, again warned about keeping interest rates low for too long, saying that without tightening policy when needed, low rates "could cause wild swings in the economy and distort the distribution of resources."
The BoJ chief said the fact that the nationwide campaign for the July 29 upper house elections in Japan was launched today did not affect the rate decision at the policy board meeting.
Speaking about the broader economy, Fukui said he has seen some progress in efforts by information technology companies to cut their inventory levels, even though the process has "not been completed yet."
He also said the sub-prime mortgages loan problem in the US has so far had "only a limited impact" on the US economy and credit market.
"Although the correction in the US housing market is (likely to be) prolonged, the underlying condition of the US economy remains solid, meaning that the possibility of the economy achieving a soft-landing is high."
Referring to local economic developments, Fukui said recent data including the Tankan June quarter business sentiment survey, tended to support his view that the economy is expanding moderately.
"The possibility seems to be high that, with a positive interaction amongst production, wages and spending, Japan can continue a long-lasting recovery," he said.
(1 US dollar = 121.92 yen)
yasuhiko.seki@thomson.com
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