BoJ raises rates, time to get back into yen carry trade

So the Bank of Japan opted to raise rates yesterday. Bloomberg reports:

The Bank of Japan yesterday voted 8-1 to increase the overnight lending rate by a quarter percentage point to 0.5 percent, the highest since 1998...

The BOJ said in a statement yesterday that core consumer prices, which exclude food, will stay around zero percent and policy makers will maintain an extremely accommodative monetary policy. It also said consumer spending and the economy will expand. Deputy Governor Kazumasa Iwata voted against the rate increase.

"There's no change in our stance that adjustments will be made slowly," Fukui said at a press conference yesterday following the bank's policy board meeting. "It's not as if we have a set schedule and plan to raise rates consecutively."

JGB yields fell at the dovish statements.

The yield on the 1.7 percent bond due in December 2016 dropped 2 basis points to 1.665 percent as of 9:04 a.m. in Tokyo, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. The level is the lowest since Jan. 26.

And the yen reached a record low against the euro. As Osao Iizuka, head of foreign exchange trading at Sumitomo Trust & Banking Co. in Tokyo, is quoted as saying: "The BOJ didn't give a clear picture of when the next rate hike will be. The time is right to get back into the yen carry trade."

That is especially likely if the Federal Reserve maintains its own interest rates at current levels, as appears likely after the latest economic data. From Reuters:

Consumer prices rose 0.2 percent while core prices, which exclude food and energy costs, climbed 0.3 percent, the Labor Department said.

Analysts were expecting the overall Consumer Price Index to inch up 0.1 percent and for core prices to rise by 0.2 percent.

The higher-than-expected consumer prices and minutes of the Federal Reserve's Jan. 30-31 meeting, which showed a predominant concern about inflation risks, diminished market expectations the Federal Reserve would lower interest rates more than once in 2007...

A key forecasting gauge for the economy rose for the second straight month, but at a smaller-than-expected 0.1 percent in January.

The rise in the U.S. Composite Index of Leading Economic Indicators was short of market expectations for a 0.2 percent gain and followed a sharp, upwardly revised 0.6 percent gain in December, the private Conference Board said.

The Bank of England also released its minutes for its February MPC meeting, showing that seven members voted for no change in interest rates while two voted for an increase. An increase still looks likely at some point later this year though, especially with the UK economy still holding up well, as reflected in the latest manufacturing data, reported by Reuters.

The Confederation of British Industry said its monthly manufacturing order books balance rose to +4 this month from -9 in January. That was the highest since June 1995 and well above analysts' forecasts for a reading of -8.

Manufacturers predicted an even sharper rise in output ahead. The expectations balance rose to +28 from +12, the highest since May 1995, and firms also appeared more confident about raising prices.