BOJ governor on alert over rising rates



TOKYO (Reuters) - Japan's central bank governor voiced concern over rising long-term interest rates on Wednesday as a raft of data provided further evidence of a solid economic recovery and added to the view that a rate rise is not far off.


"Long-term interest rates have recently risen slightly, and in addition have shown a slight trend towards more irregular movements," Bank of Japan (BOJ) Governor Toshihiko Fukui told a parliamentary committee. "Long-term interest rates are of great interest to us. We must closely monitor their movements."


Fukui offered few new hints on when the BOJ may raise short-term interest rates from current levels around zero after it scrapped a unique five-year-old ultra-easy monetary policy last month, saying he had no preconceptions on the matter.


He appeared to seek to cool speculation that the central bank will raise rates right after it finishes mopping up excess funds in the banking system -- the remnants of the now-abandoned policy framework called quantitative easing -- which is expected to happen around late June.


"When our zero rate policy will end is unrelated to when we will be finished absorbing liquidity," he said.


Japanese government bond (JGB) prices gained on his comments, with the June 10-year JGB futures contract rising as high as 132.86 up 0.28 point on the day. The lead contract hit a 5-1/2-year low of 132.24 earlier this week.


HEALTHY ECONOMY


Fukui's remarks come amid speculation that the BOJ may raise rates as early as July for the first time in six years as the economy emerges from years of deflation and slow growth.


Data released earlier in the day supported the view that business activity is healthy.


Outstanding loans held by Japan's four main categories of banks rose 0.4 percent in March from a year earlier, BOJ data showed. It was the biggest rise since current methods of calculation started in January 2001.


Following a 0.2 percent rise in February, the figures suggested that a five-year decline in bank lending is finally ending as companies boost capital spending.


"The bank loans data shows that lending is in an uptrend as companies borrow to spend on capital investment," said Yoshimasa Maruyama, an economist at BNP Paribas, adding that he expected the trend to continue for the coming year.


Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute, pointed to a rise in property-related lending.


"Land prices are bottoming out and property-related lending is growing. A lot of corporations have ample cash flow to fund their spending, so it's not as if bank lending will skyrocket, but it should continue growing steadily," Tsunoda said.


As the economy enjoys a steady recovery, the BOJ is keeping an eye on land and real estate prices as bitter memories remain of the bursting of an asset price bubble in the early 1990s that drove the economy into a decade of recession.


The BOJ said in a report on Wednesday it would inspect how banks were managing risks of syndicated loans and other new real estate-related lending in the fiscal year that began on April 1.


Other data on Wednesday added to the upbeat economic outlook.


Japan's current account surplus grew 6.2 percent in February from a year earlier to 2.2087 trillion yen ($18.68 billion).


The trade surplus stood at 1.0909 trillion yen, after a deficit in the previous month, with exports up 21.5 percent and imports up 33.2 percent.


Hiroshi Shiraishi, an economist at Lehman Brothers Japan, said external demand could be a net neutral contributor to January-March GDP growth, but the outlook for exports was bright and imports could also stay upbeat.


"Rising imports, in a sense, mean domestic demand is strong. The big issue is whether domestic consumption is really strong," he said.


"The GDP figures are likely to show consumption weakened, but this is because they will be affected by the notoriously erratic household spending survey," he said.


Japan's economy grew a real price-adjusted 1.3 percent in October-December from the previous quarter, or an annualised 5.4 percent. January-March GDP figures are due out on May 19.


Wednesday's data also showed Japan's most widely watched measure of money supply -- M2 plus certificates of deposit (CDs) -- rose 1.5 percent in March from a year earlier.


The rise was lower than a market consensus forecast for a 1.7 percent gain, but economists said the figure did not suggest that money flows were slowing to the point of hurting the economy.


($1=118.18 Yen)



Source: Ritsuko Ando at Business Scotsman