The U.S. Federal Reserve Bank's discount rate cut Tuesday may be the weight needed to tip a delicate balance in favor of a near-term easing of Japanese interest rates.
Until now, there seems to have been enough spunk in the Japanese economy for the Bank of Japan to cite in defense of its relatively tight monetary policy.However, with the economy slowing and both direct and indirect pressure building from the United States for lower Japanese rates, the central bank probably won't be able to hold out much longer.
The Bank of Japan gave no evidence in its monetary operations Wednesday morning that the Fed's rate cut Tuesday morning to 5.5 percent from 6 percent will prompt a cut in its key rate, now at 6 percent.
The Bank of Japan purchased 300 billion yen ($2.2 billion) in discount bills, at the same time recalling 130 billion yen in bank loans.
Bank of Japan watchers here said any move on rates, whether it be a discount rate cut or a de-facto lowering of the target level for the unsecured overnight call loan rate, must wait until at least next week, when bank Governor Yasushi Mieno will have returned from the United States, where he attended a meeting of bankers and finance ministers from the Group of 7 industrialized nations.
"What I think you'll see is the BOJ letting the unsecured overnight rate fall to about 8 percent after the Golden Week holidays (next week)," from its current 8.2 percent, said a money market trader at a city bank.
"I think the timing of the Fed's rate cut (immediately following the G-7 meeting) was designed to place a demand on Japan and Germany" for rate cuts, he said.
This, coupled with strong requests for lower rates from the U.S. President Bush and Treasury Secretary Nicholas Brady at the G-7 gathering, will make it hard for the Bank of Japan to fight market sentiment for lower rates, the trader said.
"The Fed's rate cut makes it easier" for the bank to lower the discount rate, said Motohide Nishi, assistant general manager of the Treasury Division at Mitsui Taiyo Kobe Bank.
It also provides an opportunity to "correct" the condition of high money market rates here, he said.
As each week passes, factors cited by the central bank as justification of its tight monetary policy become less convincing.
Wholesale and consumer prices appear to have stabilized.
Tokyo consumer prices for mid-April were up 3.3 percent from a year earlier, but down from a peak of 4.3 percent in January. Wholesale prices for the middle 10-days in April were unchanged from a year earlier.
While bank officials maintain they are concerned about the effect of rising labor and transportation cost on overall prices, the central banks' conclusion that "prices, though in a stable range, continue to edge up" looks less persuasive.
Money supply, as well, has been falling sharply, though the bank has put a brave face on the decline by saying the volume of money supply components, puffed out during years of excessive economic expansion, remains too high.
Year-on-year growth in Japan's closely watched M2 plus certificates of deposit fell to its lowest ever level of 4.9 percent in March, down from 5.5 percent in February, and down sharply from 13.2 percent last April and May.