Fukui May Cut Rate Before Leaving BOJ as Growth Slows (Update1)

Dec. 21 -- Toshihiko Fukui's final act as governor of the Bank of Japan may be to cut borrowing costs for the first time in more than six years.

Economists began predicting Fukui, 72, will have to lower rates after the Bank of Japan yesterday downgraded its assessment of the economy for the first time in three years.

The bank has raised rates twice since July 2006, when it ended a policy of keeping borrowing costs near zero to beat a decade of deflation. ``They may have to cut,'' said Robert Feldman, head of economic research at Morgan Stanley in Tokyo. ``As Fukui said yesterday, the economy is getting worse.''

Fukui has argued since 2005 that Japan's interest rates need to be higher to discourage risky investments that might halt Japan's longest postwar expansion.

In trimming its assessment, the bank said the pace of growth is slowing because stricter rules for building permits caused housing starts to plummet. The bank's bleaker outlook came one day after the government lowered its forecast for economic growth this year to 1.3 percent from 2.1 percent.

Fukui disputed the idea that slower growth means Japan's economic expansion is coming to an end. The housing slump will be temporary, he said at a news conference in Tokyo after the bank left its benchmark rate unchanged at 0.5 percent yesterday. The industry is expected to recover as builders get accustomed to the rule changes introduced in June after an architect fabricated earthquake-resistance data in 2005.

`No Change'

``There is absolutely no change to our basic monetary policy stance,'' Fukui said. The economy is still in a ``virtuous economic cycle'' in which rising profits will filter into higher wages and consumer spending.

Still, economists at Morgan Stanley, Mizuho Securities and Mitsubishi UFJ say the bank may need to cut its benchmark rate, the lowest in the industrialized world, to sustain growth.

That is partly because the labor market, wages and prices aren't behaving as the central bank predicted earlier this year.

Unemployment has risen to 4 percent from a nine-year low of 3.6 percent in July. Wages have fallen in nine of 10 months, and the central bank in October abandoned a prediction that consumer prices would increase in the year ending March 31.

Exports, the main driver of Japan's expansion this year, are also showing signs of faltering. Growth slowed in November, the Finance Ministry said yesterday, as the U.S. housing recession caused shipments to Japan's biggest market to tumble for a third month. Growth in exports to Europe and China slowed.

Lower Earnings

The 9 percent gain in the yen against the dollar during the past six months is another factor, trimming exporters' earnings.

Japan's currency was at 113.14 per dollar at 11:43 a.m. in Tokyo, unchanged from late yesterday in New York. The yield on the 10-year government bond rose 1 basis point to 1.53 percent.

The bank's most recent rate increase was in February. At the time Fukui reiterated his view that keeping them too low could eventually damage the economy. He steps down in March after five years as head of the bank. The government hasn't announced his replacement.

``The central bank probably made a mistake in February when it raised rates'' because it crippled small companies, said Yuji Shimanaka, chief economist at Mitsubishi UFJ Research and Consulting in Tokyo. ``Cutting interest rates is an urgent task for the Bank of Japan to rescue the economy.''

Small firms, which employ 70 percent of Japan's workers, believe conditions will deteriorate in the next three months, according to the bank's most recent business confidence survey, released Dec. 14.

Weak Companies

``Companies, especially small ones, weren't strong enough to withstand 0.5 percent interest rates,'' said Shimanaka, a member of the Cabinet Office committee that determines whether the economy is recession.

A rate cut would be the first since March 2001, when the stock-market bubble for Internet and technology shares burst. This weakened global growth, and Japan slid into its third recession in a decade.

Before the bank cut its assessment, most of the economists in a Bloomberg survey expected the central bank to keep rates unchanged through most of 2008 as oil prices fuel inflation. Of 31 economists surveyed last week, 21 said the bank will keep the key rate on hold at least until the second half of next year.

``Whether the economy will be able to sustain growth will be put to the test next year as downside risks accumulate,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``The BOJ will probably stay on hold through 2008, but if the yen strengthens, they may be forced to seriously consider cutting.''

Inflation Deterrent

One deterrent to a rate cut may be the outlook for prices. The recent increases in the cost of oil and other commodities are beginning to push Japan's consumer price index higher. Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo, predicts the index, excluding fresh food, may climb 0.5 percent in December. The measure rose 0.1 percent in October, the first increase this year.

``If there's any action in the first quarter it would be to cut rates,'' said Graham Davis, a director at the Economist Intelligence Unit in Tokyo.

Asian Stocks Gain for First Time in Eight Days; Sharp Gains

Dec. 21 -- Asian stocks rose for the first time in eight days. National Australia Bank Ltd. paced an advance by Australian companies as investors bet recent declines have been excessive relative to earnings prospects.

``It has been a horrible seven days and now we're seeing the market bounce back a little bit,'' said Paul Xiradis, who helps manage the equivalent of $11 billion at Ausbil Dexia in Sydney. ``People are still cautious but they are seeing value out there.''

Sharp Corp., Japan's largest maker of liquid-crystal displays, paced gains in Japan after a report said Toshiba Corp. will align with the company on display panels. Canon Inc. fell to the lowest in almost 18 months after a report said the company's profit may rise 7 percent, missing forecasts.

The MSCI Asia Pacific Index gained 0.7 percent to 152.83 at 11:14 a.m. in Tokyo. All 10 industry groups on the benchmark climbed. The measure fell 2.4 percent this week.

Japan's Nikkei 225 Stock Average added 1.2 percent to 15,205.16. All Asia's benchmarks advanced.

Australia's S&P/ASX 200 rose 0.7 percent, snapping its longest losing streak in five years.

National Australia Bank, the country's biggest lender which fell 5.1 percent in the past four days, gained 2.4 percent to A$37.36. Westpac Banking Corp., the fourth-largest Australian bank, added 33 cents, or 1.2 percent, to A$27.62, after sliding 5.9 percent earlier this week.

Sharp gained 2.3 percent to 1,944 yen. Toshiba will buy 40- inch to 60-inch LCD panels made at Sharp's new Japanese factory, the Nikkei newspaper reported today. Sharp spokesman Hiroshi Takenami said the company is considering an alliance with Toshiba.