Bank of Japan sticks to rate hold strategy

For the sixth month in a row, the board voted eight to one in favour of the decision. Again, Atsushi Mizuno was the sole dissenter, voting for a 25 basis point hike.

In spite of data published on Tuesday revealing better-than-expected growth of 2.6% for the third quarter, the central bank was forced to hold rates because of the downside risks that global events present to Japan's economy.

"We can't rule out the risk that the United States economy will deteriorate more than expected,'' Toshihiko Fukui, the governor of the Bank of Japan, said following the decision. The governor added he expects United States housing investment will decline further.

"The likelihood of a rate hike seems to be receding. While inflation is set to turn positive in the near future, it will be mostly driven by higher oil prices, rather than any pressures coming from the domestic economy," said Colin Asher, a senior economist at Nomura told Central Bank News. "We now see the most likely timing for the next hike as the second quarter of 2008, after Fukui's term has ended."

The recent appreciation of the yen against the dollar could prove a further obstacle to hiking rates.

Yasuo Fukada, Japan's prime minister, told the Financial Times on Tuesday that the yen, which reached an 18-month high against the greenback last night, was appreciating "too fast". However, a rise in value over the long run was deemed acceptable.

Fukui, however, pointed to both positive and negative factors of the yen's appreciation: "Exchange rates and the economy interact with each other. If they move in one direction, that could hurt the competitiveness of exporters, but we also have to look at whether that would improve the terms of trade for Japanese industries."

To read the Bank of Japan's statement, click here