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 Thursday 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 Thursday, 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 Thursday.
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 Thursday, 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.
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.
(Source: Bloomberg)