07-15-2008
The Bank of Japan cut its economic growth forecast, raised its inflation estimate and kept the benchmark interest rate at 0.5 percent, saying higher commodity prices are hurting expansion. The world's second-largest economy will grow 1.2 percent in the year ending March 31, slower than the 1.5 percent forecast on April 30, the central bank said in a statement in Tokyo. Consumer prices excluding fresh food will climb 1.8 percent, more than the 1.1 percent projected three months ago, it said. Growth is “slowing further” because higher energy and raw-materials costs are discouraging businesses and consumers from spending, the bank said. Governor Masaaki Shiirakawa has said the risk that record commodity costs will weaken spending and derail growth is more pressing than tackling inflation. The Bank of Japan regards core prices as stable when they are between zero and 2 percent. The yen traded at 105.85 per dollar at 2:32 p.m. in Tokyo compared with 105.80 before the announcement. Government debt held gains, sending the yield on the 10-year bond 4.5 basis points lower to 1.535 percent. “Economic growth is slowing further, reflecting weaker growth in business fixed investment and private consumption against the backdrop of high energy and materials prices,” the central bank said. The slowdown is temporary and inflation will abate next fiscal year, it added. The economy will expand 1.5 percent in the year starting April 1 and core consumer prices will rise 1.1 percent, the policy board forecast. All 39 economists surveyed expected today's rate decision. In April, the central bank shelved a policy calling for higher borrowing costs. The benchmark rate, doubled in February 2007, is the lowest among major economies. Commodities costs drained 1 percent from Japan's national income between 2000 and 2007, the Cabinet Office said last month. Japan imports almost all of its oil and 60 percent of its food. “Inflationary pressures are increasing globally,” the central bank said. “In Japan, it is necessary to be mindful of upside risks due to changes in the inflation expectations of households and the price-setting behavior of firms in addition to developments in energy and materials prices.” Consumer prices excluding fresh fish, fruit and vegetables rose 1.5 percent in May from a year earlier, the fastest pace in a decade, and economists say the inflation measure will soon surpass 2 percent. Core price gains will “gradually moderate” after they become “somewhat elevated in coming months” because of oil and food, the bank said. Should economic risks subside, Japan's expansion may become vulnerable to the side effects of keeping rates too low, it said. Large companies expect profits to decline this year for the first time since the 2001 recession, the central bank's Tankan survey showed July 1. That will make it more difficult for businesses to raise wages, which grew 0.2 percent in May, the slowest pace this year. Household confidence fell to the lowest level in at least 26 years in June as higher gasoline and food prices eroded purchasing power. The central bank cut its assessment of consumer spending in all of Japan's nine regions last week. Stalled wage growth is a reason households aren't spending and “that's why Japan doesn't have a risk of secondary inflation,” Economic and Fiscal Policy Minister Hiroko Ota said in an interview on July 3. “Beating out deflation, rather than the risk of inflation, is an important issue for Japan now.”

  07-14-2008
Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages. Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank. The steps would bring the U.S. closer to giving an explicit guarantee for the debt sold by the shareholder-owned, federally chartered companies. That reflects a need for the government to bail out an economy that's been rocked by the worst housing recession in 25 years, the credit crisis, and soaring energy costs. The announcements followed weekend talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing. Paulson proposed that Congress give the Treasury temporary authority to buy equity in the firms “if needed,” and to increase their lines of credit with the department from $2.25 billion each. The temporary authority may be for 18 months, a Treasury official told reporters on a conference call on condition of anonymity. As lenders retreated from the housing market, Washington- based Fannie Mae and McLean, Virginia-based Freddie Mac grew to account for more than 80 percent of the home loans packaged into securities. Freddie Mac is scheduled to sell $3 billion in short-term notes today, and Paulson's comments indicate a concern about a collapse in private investors' willingness to fund the firms. The companies issue debt to raise money for their purchases of mortgage securities. Paulson also proposed that the Fed get a “consultative role” overseeing the companies' capital requirements. The central bank's role has already grown during the credit crisis to include sharing supervision of investment banks with the Securities and Exchange Commission.