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'Liquidity tightening by BoJ crucial'
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July 14, 2006

Hiromichi Shirakawa of Credit Suisse Securities feels that Bank of Japan's decision on overnight call rates is as expected. He also feels that the bank has taken a cautious stance.

Shirakawa believes that liquidity tightening by Bank of Japan will be crucial for emerging markets. According to him, Bank of Japan may be under the new government's pressure to keep rates stable.

He further states that Bank of Japan may not raise rates again till the end of the year.

Excerpts of CNBC-TV18's exclusive interview with Hiromichi Shirakawa

What is your assessment of what the BoJ said in its statement?

The overnight call rate decision was very much in earnest with the market and our expectations. It is not a big surprise that BoJ raised the offshore discount rate only to 0.4 per cent, which was lower than the market consensus. We tend to think that this lower than expected offshore discount rate by Bank of Japan, is a message suggesting that BoJ is fairly cautious about the outlook for the year on capital markets, equity markets and the economy going forward.

Their message is that they are not that inclined to raising the offshore discount rate over the overnight call rate going forward significantly. On the other hand, the BoJ from the statement seems to have captured the option for raising rates before the end. I think the BoJ did not lose out any rate hike before the end. That was a bit surprising to us because BoJ might want to put a kind of provision to the statement, which allows them to be fairly flexible going forward.

Do you expect global capital and equity markets to react more to what they have done on the discount rate rather than the overnight call rate?

I think the discount rate story is probably a bit too technical to grow above the market player. This is most relating to Japanese short-term financing issues. The issue for the global market would be such that the Bank of Japan, here on starts the final stage of liquidity draining. So the forecast for global market players is whether or not the final stage of Central Bank liquidity draining would affect global capital markets.

Have you heard enough quite clearly to gauge what they might do for the rest of this year?

Actually ofcourse they have the option to move again by the end, but my sense is that the BoJ would need some time to check if this decision today is not affecting the global markets and Japanese domestic markets. Also we have to be aware of the fact that a new government is going to be formed late September, and it is up to the next Prime Minister, but the monetary policy will be forced to coordinate with the fiscal policy.

In that sense, BoJ will possibly be under some pressure from the new government to maintain lower interest rates for longer. So I am not expecting any follow up rate hike before the end.

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