Japan: parting shot

The Bank of Japan Policy Board meets on Monday to decide monetary policy.

Governor Toshihiko Fukui has wanted to raise rates, ending once and for all the era of cheap borrowing introduced to stimulate the economy. He managed to hike a near zero policy rate to 0.5% in two 25 basis point moves, although the last was as far back as February. The economy has continued its recovery, but far from emphatically. Growth has over-relied on exports and consumption needs to pick up to give the economy a decent underpinning. Coming into 2008, however, the US economy is slowing and exports look vulnerable. As for consumption, confidence is dwindling, which suggests less spending, even belt tightening. Companies will not take up the slack while the outlook remains dim, depressing investment and spending even as rates remain low.

And so, far from lifting the policy rate, speculation is building that the Policy Board could cut it. Next week would seem a little premature for that, however. Nevertheless, Fukui steps down in March, as do his deputies. Looking to fire the economy up one more time, might a cut be his parting shot?