BoJ Keeps Rate at 0.5%; Stocks Surge on U.S. Rally

The Bank of Japan voted 8-1, to hold the benchmark lending rate at 0.5%, as hawk Atsushi Mizuno was the only supporter of hiking for the third consecutive meeting. BoJ Governor Toshihiko Fukui warned of the risk of keeping rates "very low." He said the yen carry trade, like the U.S. subprime situation, is an example of how resources can be misallocated. Fukui referred to U.S. housing weakness and credit market turmoil as growing risks for Japanese exporters, but said he doesn't expect the U.S. to fall into a recession. On Tuesday the FOMC voted to cut 0.5% from both the federal-funds and discount rates, which sent stocks soaring. Japanese stocks also traded strongly higher, with both the Nikkei 225 and broader TOPIX gaining 3.7%. Among the biggest gainers on the Nikkei were ORIX +8.5% to ¥24,640, Nomura Holdings +7.7% to ¥1,881 and Mitsubishi UFJ FG +6.1% to ¥1.05M. The yen weakened about 0.8% against the U.S. dollar, last trading near the 115.9 level. The BoJ next meets Oct. 10-11. Its quarterly tankan (business sentiment survey) is due Oct. 1 and its semi-annual outlook on the economy is due Oct. 31.

Sources: Bloomberg, Wall Street Journal
Commentary: The U.S. Rate Slash Shows Things Are Even Worse Than Assumed • Yen Carry Trade Unwinding? Not So Fast... • Japan: Nomura's September Individual Investor Survey
Stocks/ETFs to watch: MTU, MFG, IX, NMR. ETFs: EWJ, FXY

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