BofJ Expected to Keep Key Rate Unchanged

TOKYO -- Japan's central bank was expected to leave its key interest rate unchanged as it began a two-day policy meeting amid general nervousness about the global economy.

"Raising interest rates is out of the question," said Tomoyuki Ohta, senior economist at Mizuho Research Institute in Tokyo. "On the other hand, there won't be an interest rate cut either because despite the worries about a slowdown, it's clear it's not as bad as a recession."

Ohta said the Bank of Japan is likely to do nothing for about a year unless things change dramatically.

Much of last year, market watchers had expected the BOJ would soon start raising its key interest rate, now at 0.5 percent. The global economic turmoil set off at midyear by the U.S. subprime mortgage crisis scotched that view.

High material costs and gas prices are adding to worries about the economy, although signs about its health have been remarkably solid.

Story Continues Below

Last week, the government said the economy grew at a stronger-than-expected 3.3 percent annual pace in the first quarter, racking up its third consecutive quarter of growth.

Ohta and other analysts say the good appearance is deceiving. Consumer spending remains weak, and the economy remains dependent on exports, they say. And export growth could stumble if overseas economies falter.

In a speech earlier this month, Bank of Japan Gov. Masaaki Shirakawa made remarks that indicated a rate cut wasn't coming soon.

The Bank of Japan "is in a situation that requires us to be extremely watchful of downside risks to the economy," said Shirakawa, who took office in April.

In a recent report, Lehman Brothers said expectations for an interest rate cut had dwindled. The global economy was unlikely to worsen so much that pressure for a rate cut would rise, the investment bank said.

Just as unlikely was a rate increase, a move Japan's central bank was unlikely to take until the latter half of next year, it said.

Editor's note:
Four Reasons to Own This Medical Devices ETF
The Coming Oil Price Crash Could Make You a Fortune
U.S. Recession Could Devastate Commodity Prices.
The Greatest Investor You've Never Heard Of