The yen is
within reach of a 15-year high against the dollar but the pace of its rise has
been gradual and calls for BOJ action from businesses and politicians have been
subdued.
The decision to
leave policy unchanged came as little surprise to markets, which had expected
the BOJ to stand pat unless the yen soars at a pace of 2 to 3 yen per day and
heads for a record high beyond 80 yen.
BOJ Gov.
Masaaki Shirakawa said the board spent much time debating the impact of yen
gains on the economy as they could potentially hurt business sentiment.
But he repeated
comments made at the last policy review in July that risks to the economy were
evenly balanced and yen moves alone would not trigger a policy response.
"Currency
moves are among factors that affect the economy. But they don't immediately determine
monetary policy," Shirakawa told a news conference.
Japan's finance
minister cautioned that excessive currency moves were not good for the economy
but he did not escalate the level of his recent warnings, while the economics
minister said the yen's rise may not continue for a long time.
Policymakers in
Tokyo fear that a strong yen could derail the feeble recovery from the global
crisis. Similarly, pressures are mounting on US officials as data points to
faltering growth in the world's biggest economy.
The
policy-setting Federal Open Market Committee (FOMC) of the US Federal Reserve
meets later on Tuesday.
"It seems
they (BOJ) still want to wait and see before taking any action, in particular
they want to see the outcome of the FOMC meeting," said Takeshi Minami,
chief economist at Norinchukin Research Institute.
"They seem
to be a little more optimistic about the economy than the market
consensus."
The Fed may
send a clear signal it is prepared to print more money to support a faltering
economic recovery. The decision is expected around 1815 GMT.
While any steps
by the Fed might initially be symbolic, they will still be more aggressive than
the minor steps preferred by the BOJ and so may drive down the dollar/yen rate,
analysts say.
The dollar is
within reach of its 15 year low against the yen after Friday's weak US payrolls
data heightened expectations the Fed will contemplate further steps to support
the economy. It was holding near 85.75 yen on Tuesday.
The BOJ kept
interest rates at 0.1 percent in a unanimous vote. It also kept its economic
assessment unchanged and said that the central bank needed to watch how recent
market moves could affect Japanese and global economies.
The government
maintained its view the economy is steadily picking up, but a government
official warned recent yen gains have been sudden and are undesirable for
growth.
Big Japanese
export firms are not panicking about the yen rise yet, as many have become more
resilient to currency fluctuations as they shift production overseas.
"For cars
built in Japan, the business is not viable at a dollar of 85 yen," said
Yoichi Hojo, chief financial officer at Honda Motor Co.
"But
globally, there are regions that will make up for the loss so we can make a
profit (this year even at 85 yen).
The pain,
however, may intensify if the yen stays around 85 to the dollar for a prolonged
period, higher than the 90.18 yen forecast by big manufacturers in the BOJ's
June tankan survey, analysts say.
Finance
Minister Yoshihiko Noda declined to comment on currency intervention but said
he was watching markets with utmost caution.
The Democratic
Party-led government has not piled much pressure on the BOJ for now as the
ruling party, weak after losing its parliamentary majority in upper house
elections in July, is preoccupied with seeking ways to gain support from other
parties in passing legislation.
But that may
change in the autumn, when parliament convenes for full-fledged debate on the
state budget and the Democrats decide whether to give incumbent Naoto Kan
another term in a party leadership vote in September, some analysts say.
Even if it does
act, the BOJ will probably settle for a minor tweak of policy, rather than a
radical change such as a return to full-blown quantitative easing. The effect
on the yen and the economy would therefore be limited, analysts say.
Analysts say a
yen rise and government pressure were largely behind the BOJ's decision to ease
policy in December last year by setting up a facility offering cheap funds to
banks.
