TOKYO (AFP) — Japan's central bank began a policy meeting Monday with analysts expecting it will hold off on raising super-low interest rates amid worries that both the domestic and US economies are slowing down.
The Bank of Japan started the two-day meeting amid moves by the world's other major central banks to ease borrowing costs due to financial market turmoil over the US subprime loan crisis.
The central bank is seen as likely to leave rates on hold at 0.5 percent, where they have been since February last year. The rate is the lowest among the world's major economies.
"It will be very unlikely for the central bank to raise rates at least within this year," said Hiromichi Shirakawa, chief economist for Credit Suisse in Tokyo.
"The focus rather will be whether the bank will have to move to lower the rates," he added.
BoJ governor Toshihiko Fukui has warned that the Japanese economy is due to slow down in the near term due to stagnant investment in the housing industry after a tightening of regulations to protect against earthquakes.
Fukui has said that the economy will pick up soon thereafter to post a modest expansion, but warned of effects of a slowdown in the United States, one of Japan's key export market.
The US Federal Reserve meets next week and is expected to slash interest rates for the fourth straight time to help the world's largest economy cope with the subprime loan crisis.
The US economy has been hit by rising defaults by "subprime," or high-risk, customers who were given loans in the last housing boom but now cannot pay them back, leading to concerns of a credit crunch as banks contain losses.
Asian share prices fell on Monday on disappointment about a stimulus package unveiled by US President George W. Bush.
"It will be unrealistic for the Bank of Japan to take action now that could dilute the impact of policies taken by the US and other central banks to stem the downside risk from the credit crunch," said Osamu Tamada, strategist at Mizuho Investors Securities.
Credit Suisse's Shirakawa said the central bank will have to lower its economic outlook further until around summertime.
"Starting with the housing sector, the BoJ will revise the outlook down in the exports, production and employment sectors," he said. "The downward revisions will peak sometime before the summit."
Japan will host the Group of Eight rich nations in July.
"They don't have the option of raising rates now," he said. "They may even face the pressure politically to ease rates."
The Bank of Japan raised interest rates in 2006 for the first time in almost six years. It hiked rates again in February but has held them steady since then amid domestic political uncertainty and financial market volatility.
Fukui has said he hoped to bring normalcy to Japan's monetary policy. In the so-called "carry trade," high-risk players binge on Japan's ultra-low interest rates to invest in more lucrative markets.
But Fukui seems unlikely to be able to raise rates before he leaves office in March with concerns mounting about a US recession.
"If exports, which have so far been supporting the Japanese economy, were to slow down due to the weakness in the US economy, BoJ board members may even discuss cutting rates," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.
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