Money and Metals

The Financial Times reports on Japans rate move. "The Bank of Japan’s policy board on Wednesday voted eight to one to raise interest rates a notch to 0.5 per cent, pointing to strong economic growth data as it made the first increase since July."

"The yen slipped against the dollar and euro after the BoJ announcement, reflecting investors’ doubts the move would do much to shore up the currency. The yen had initially strengthened ahead of the BoJ announcement after Japanese media reported that Toshihiko Fukui, the BoJ governor, had recommended a 25 basis point increase in rates. But it reversed course immediately after the official announcement and fell on the day by 0.4 per cent to Y120.45 against the dollar."

"The BoJ’s decision to raise rates came as the result of strong growth in the fourth quarter, when gross domestic product expanded by 4.8 per cent on an annualised basis. That was the only significant positive piece of data released since last month when the board voted six to three against a rate increase."

"Masaaki Kanno, chief economist at JP Morgan in Tokyo, said: 'It is a little puzzling to explain why five board members changed their mind.' He said the GDP data on its own, by definition backward looking, was not enough to explain a rise in terms of the bank’s stated forward-looking framework."

"However, leaving aside what he said was the bank’s failure properly to explain its rationale, Mr Kanno said the board was justified in raising rates. He said it had stressed the second pillar of its policy framework, which concentrates on risks. These included the possibility of an asset price bubble and, particularly, risks associated with the weak yen, he said."

"'This is an indirect warning from the BoJ: 'Don’t expect a weak yen forever.' he added."

"Takatoshi Ito, a member of cabinet’s council on fiscal and economic policy, said before the meeting: 'If they raise rates they better have a good rationale for doing so.' He said the government probably would not complain but would hold the BoJ accountable if things went wrong."

"The Liberal Democratic party has been particularly adamant that it is too early to contemplate a rate rise. Even after five years of recovery, it says, the economy is fragile and has not yet definitively escaped from deflation."

"The BoJ could face a rough patch over the next few months when inflation, as measured by the core consumer price index, is likely to turn negative. The bank will argue that this is due to technical factors related to oil prices, included in Japan’s headline index."

"Economists said the bank would almost certainly leave rates unchanged for the next several months."