The Bank of Japan refrained from raising interest rates in November because of concern that “unstable” financial markets may derail world economic growth, minutes show.

“Global financial markets continued to be unstable and there was uncertainty regarding global economic developments,” most board members said at their Nov. 12-13 policy meeting, according to the minutes published Wednesday in Tokyo.
Since the meeting, the U.S. Federal Reserve, European Central Bank and three other central banks pledged to inject billions of dollars into money markets to alleviate a credit squeeze threatening global economic growth. The Bank of Japan kept the key interest rate at 0.5 percent last week and lowered its economic assessment for the first time in three years.
“With the minutes pointing out downside risks for the world economy, led by the U.S., expectations of higher rates are dwindling,” said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp. in Tokyo.
Some members said the risk that the U.S. economy will lose further momentum “had increased somewhat,” although they added that Japan's largest export market will probably keep growing, the minutes show.
The yield on Japan's 10-year bond fell 1.5 basis points to 1.565 percent at 12:26 P.M. in Tokyo. The yen traded at 114.04 per dollar from 114.21 before the minutes were published.
Gradual rate increases
The members said there was no change to the bank's policy that interest rates should be raised gradually as long as Japan's economy expands in accordance with their expectations. The board will closely examine data and market movements to decide when to change policy, the minutes showed. Japan's key rate is the lowest in the industrialized world.
“The Bank of Japan will probably have no other choice but to stand pat during the first half of 2008, when the economy will probably be stuck in a soft patch,” said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo.
The bank last week said economic growth is slowing because of a housing slump triggered by stricter rules for obtaining building permits. A few members said the decline in housing investment, if prolonged, may spread to other areas of the economy and damp the confidence of businesses and consumers.
Sentiment among the nation's largest companies fell to the lowest in two years, the bank's quarterly Tankan survey showed this month. Household confidence fell to the lowest since 2003.
A few members said companies were reaching the limit of their ability to absorb higher energy and raw materials prices and some were beginning to pass the costs on to clients. Members agreed on the need to consider the impact of oil when assessing the outlook for consumer prices.
Surging energy costs helped core consumer prices rise 0.l percent in October, the first gain this year, and a report on Dec. 28 will probably show inflation accelerated in November.
Core consumer prices, which exclude fresh food, climbed 0.3 percent last month from a year earlier, according to the median estimate of 36 economists surveyed by Bloomberg News.
(Source: Bloomberg)