BOJ Likely to Keep Rate at 0.5% as Confidence Wanes (Update2)

Dec. 18 -- The Bank of Japan will probably refrain from raising interest rates this week after a drop in business confidence signaled companies are bracing for slower economic growth.

Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent on Dec. 20, according to all 44 economists surveyed by Bloomberg News. The rate, doubled in February, is the lowest among major economies.

Costlier oil and raw materials are eating into corporate earnings just as a decelerating U.S. economy dims prospects for global growth and demand for exports. The decline in business sentiment may undermine the central bank's case that rising profits will filter into higher wages and consumer spending.

``It's getting clearer that the economy is drifting from the Bank of Japan's bullish outlook,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``Downside risks are mounting both at home and overseas, and the bank will probably be forced to keep a policy status quo through 2008.''

Fukui, who last year oversaw the bank's shift from a policy of keeping rates near zero percent, probably won't be able to increase borrowing costs again before his term expires in March. Of 31 economists surveyed, 21 said the bank will keep the key rate on hold at least until the second half of 2008.

Weak profits at small companies could hamper wage growth and consumer spending, Fukui said this month. He acknowledged that the benefits of Japan's corporate-led expansion aren't flowing to households as quickly as he'd anticipated.

Weak Profits

Japan's large manufacturers and service companies became the least optimistic about the economic outlook in more than two years, the central bank's Tankan survey showed on Dec. 14. Companies surveyed said costs were rising faster than they could pass on to clients.

Households last month became the most pessimistic in almost four years as gasoline and food prices surged while wages fell.

``Until recently, the Bank of Japan argued it couldn't raise rates because of the U.S. home-loan problem,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``Now they'll say it's because of a slowdown in the domestic economy, even if the subprime effect recedes.''

The Federal Reserve, European Central Bank and three other central banks last week jointly pledged to add cash to money markets to alleviate a credit squeeze threatening global growth.

No Choice

``The reality is, it's impossible for the Bank of Japan to do the opposite when the U.S. and European central banks are attempting to provide more liquidity,'' said Akio Makabe, a professor of economics at Shinshu University in Nagano, central Japan. ``The BOJ will have no other choice but to push back its next rate hike, probably until around June.''

The Bank of Japan raised the key rate from near zero percent for the first time in almost six years in July 2006 amid signs the economy was emerging from deflation. Consumer prices resumed sliding seven months later.

Core prices, which exclude fresh food, rose for the first time this year in October. Most of the 0.1 percent gain came from near-record energy costs and food price increases caused by costlier grains and dairy products.

``Consumer-price increases without wage growth are bad inflation and harmful for economic growth,'' said Masaaki Kanno, chief economist at JPMorgan in Tokyo and a former central bank official. ``Rising energy and food prices are eroding disposable incomes and hampering consumption.''

Investors see a 1 percent chance of a rate increase at this week's meeting, according to Credit Suisse Group calculations based on interest-rate swap trading.

Board member Atsushi Mizuno, the sole advocate of a rate increase since July, may vote with the majority, said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo.

The central bank will announce its policy decision on Dec. 20 in Tokyo, probably by early afternoon. It will publish its monthly assessment of the economy at 3 p.m. and Fukui will hold a news briefing at 3:30 p.m.

===========================================================
As of 12/18/07           BOJ     BOJ     BOJ     BOJ
                      Rates   Rates   Rates   Rates
===========================================================
Date of Release         12/20   01/22   02/15   03/07
Time period             2007    2008    2008    2008
Measure                   %       %       %       %
-----------------------------------------------------------
# of replies             44      32      31      31
Median Forecast         0.50%   0.50%   0.50%   0.50%
% Forecast at Median   100.0%  100.0%   96.8%   96.8%
Average Forecast        0.50%   0.50%   0.51%   0.51%
Expected change         0.00%   0.00%  -0.25%  -0.25%
High Forecast           0.50%   0.50%   0.75%   0.75%
Low Forecast            0.50%   0.50%   0.50%   0.50%
Previous forecast       0.50%   0.50%   0.75%   0.75%
-----------------------------------------------------------
ABN Amro Sec.           0.50%   0.50%   0.50%   0.50%
Action Economics        0.50%    ---     ---     ---
Aletti Gestielle        0.50%   0.50%   0.50%   0.50%
BNP Paribas             0.50%   0.50%   0.50%   0.50%
Bank of America         0.50%   0.50%   0.50%   0.50%
Bayerische Landesbank   0.50%   0.50%   0.50%   0.50%
CFC Seymour             0.50%   0.50%   0.50%   0.50%
Calyon                  0.50%    ---     ---     ---
Capital Economics       0.50%   0.50%   0.75%   0.75%
Commerzbank             0.50%    ---     ---     ---
Credit Suisse           0.50%   0.50%   0.50%   0.50%
DBS Group               0.50%   0.50%   0.50%   0.50%
DZ Bank                 0.50%   0.50%   0.50%   0.50%
Dai-Ichi Life Resrch    0.50%   0.50%   0.50%   0.50%
Daiwa Research Inst.    0.50%   0.50%   0.50%   0.50%
Daiwa Sec SMBC          0.50%   0.50%   0.50%   0.50%
Deutsche Bank           0.50%   0.50%    ---     ---
Dresdner Kleinwort      0.50%    ---     ---     ---
Dun & Bradstreet        0.50%    ---     ---     ---
Fortis Bank             0.50%    ---     ---     ---
Goldman Sachs           0.50%   0.50%   0.50%   0.50%
HSBC                    0.50%   0.50%   0.50%   0.50%
Helaba                  0.50%   0.50%   0.50%   0.50%
ING                     0.50%    ---     ---     ---
IXIS CIB                0.50%   0.50%   0.50%   0.50%
J.P. Morgan             0.50%   0.50%   0.50%   0.50%
Lloyd's TSB             0.50%   0.50%   0.50%   0.50%
M.M. Warburg & Co.      0.50%   0.50%   0.50%   0.50%
Merrill Lynch           0.50%   0.50%   0.50%   0.50%
Mitsubishi UFJ Sec      0.50%   0.50%   0.50%   0.50%
Mizuho Securities       0.50%   0.50%   0.50%   0.50%
Morgan Stanley          0.50%   0.50%   0.50%   0.50%
Nikko Citigroup         0.50%   0.50%   0.50%   0.50%
Nomura Securities       0.50%   0.50%   0.50%   0.50%
Norinchukin Research    0.50%   0.50%   0.50%   0.50%
Ried Thunberg           0.50%    ---     ---     ---
RBS Securities          0.50%   0.50%   0.50%   0.50%
Shinkin Asset           0.50%    ---     ---     ---
Shinshu Univeristy      0.50%   0.50%   0.50%   0.50%
Standard Chartered      0.50%    ---     ---     ---
Stone & McCarthy        0.50%    ---     ---     ---
Totan Research          0.50%   0.50%   0.50%   0.50%
UBS Securities          0.50%   0.50%   0.50%   0.50%
Unicredit MIB           0.50%    ---     ---     ---
===========================================================

Asian Stocks Drop to Three-Month Low; Toyota, BHP Billiton Fall

Dec. 18 -- Asian stocks fell, extending a global equity rout, on mounting concern that the U.S. housing slump and credit crisis will stall growth in the world's biggest economy.

Toyota Motor Corp., No. 2 in U.S. sales, led declines among exporters. BHP Billiton Ltd. and Posco dropped after metal and oil prices fell.

The MSCI Asia Pacific Index lost 0.6 percent to 151.43 as of 10:14 a.m. in Tokyo, adding to a four-day, 7.9 percent drop and set for its lowest close since Sept. 18. All Asia's benchmarks open for trading fell.

U.S. stocks completed their sharpest two-day decline yesterday in more than a month, pushing the Standard & Poor's 500 Index down 1.5 percent and trimming its gain for the year to less than 2 percent.

Homebuilder confidence remained at a record low in the U.S. and manufacturing in New York expanded this month at the slowest pace since May.

National benchmarks fell in all 18 western European markets except Portugal yesterday. France's CAC 40 dropped 1.6 percent, as did Germany's DAX. The U.K.'s FTSE 100 slipped 1.9 percent.