BoJ Holds Rates Again at 0.5%; ECB Signals Another Rate Hike

The Bank of Japan [BoJ] ended a two-day meeting Thursday, voting 8-1 to hold its benchmark interest rate at 0.5%. Japanese stocks closed broadly higher, recouping more of last week's heavy losses, while the yen weakened back towards the 116 level against the U.S. dollar. BoJ governor Toshihiko Fukui warned "distortions and the misallocation of resources could occur if interest rates are kept at levels inconsistent with the economy," adding that the Bank is ready to act when it is confident in its judgment. The decision to pause was widely expected given recent market turmoil. Investors currently expect a 39% chance of a rate hike next month (Sept. 19), according to Credit Suisse. Separately, the European Central Bank signaled a rate hike is still possible at its next meeting on September 6, despite recent credit market turmoil. In a statement Wednesday, it said, "The position of the Governing Council of the ECB on its monetary policy stance was expressed by its President on 2 August 2007," at which time ECB president Jean-Claude Trichet said the bank would exercise "strong vigilance" against inflation risks. Market participants now expect more than a 60% chance of a 0.25% rate hike to 4.25%, compared to 30% on Tuesday.

Sources: BoJ report, ECB press release, Bloomberg, Wall Street Journal I, II
Commentary: 'Flight of the Foreigner' in Tokyo Means Medium-Term Trading Channel • ECB Will Continue To Print Money By the Truckload — Is the Euro In Trouble? • Japan: Q2 GDP Slows; BOJ Rate Hike Less Likely
Stocks/ETFs to watch: MTU, MFG, IX. ETFs: EWJ, FXY, EZU, VGK, FEZ, FXE, DBV

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