Monday, May 29, 2006

Overnight rates cause concern in Japan

by Brian Turner

In an attempt to keep overnight interest rates in check, the Bank of Japan put ¥1,500 billion ($13.5 billion) into money markets after rates again challenged the 0.1 percent ceiling set by the Bank’s current policy of keeping interest rates at zero for all practical purposes. The move, which came after the Bank put ¥500 billion into money markets last week, sent the overnight rate back down to the 0.07 - 0.08 level.

The move has fueled speculation that the Bank will raise interest rates by a quarter of a percent when it meets in June. The Bank has tried to calm such rumors by dropping hints that it is no hurry to raise interest rates.

Interest rates began to go up rapidly after liquidity levels went below ¥13,000 billion last week. At the time the Bank announced an end to its ultra-loose monetary policy in March, liquidity was more than ¥30,000 billion. This meant that there was enough money available for zero interest overnight money for anyone who wanted it.

The rapid rise in the overnight rate surprised most observers including many officials at the Bank of Japan. The conventional wisdom had been that the rate would remain close to zero at least until liquidity had dropped to ¥8,000 billion.

 

 

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