BoJ holds rates

The Bank of Japan left interest rates unchanged yesterday but the next move is still likely to be up. Bloomberg reports:

Bank of Japan Governor Toshihiko Fukui reiterated the need to raise interest rates in the world's second-largest economy after policy makers kept the benchmark rate at 0.5 percent today.

The bank acknowledges the risk of keeping rates low for too long, Fukui told reporters in Tokyo. He cited the yen carry trade, where investors borrow the currency to buy higher-yielding assets overseas, as an example of how resources can be misallocated as a result of cheap credit.

"Given that Japan's economy is stably growing at a rate of about 2 percent, the current level of interest rates is very low," Fukui said. "There's no change in our stance that adjusting interest rates is a major policy issue."

Fukui and his colleagues voted 8-1 to leave the key overnight lending rate unchanged, after the economy shrank last quarter and the U.S. Federal Reserve cut borrowing costs to avert a recession. Fukui said policy board member Atsushi Mizuno proposed a rate increase.

Japan's index of leading economic indicators for July, which was revised up to 72.7 from the initial estimate of 70.0, certainly suggests that the economy is likely to shake off its second quarter contraction soon.

The US economy, though, is likely to remain dragged down by housing for a while more after housing starts and permits both fell to 12-year lows in August. The consolation is that inflation continues to moderate, with overall consumer prices falling 0.1 percent in August and the core rate rising 0.2 percent.