BOJ Holds Again; Q3 GDP Surprises to Upside

As expected, the Bank of Japan voted 8-1 Tuesday to hold its benchmark rate at 0.5% -- unchanged since February. Although Q3 (July - Sept.) GDP rebounded to a better-than-expected 2.6% annualized growth rate (vs. estimates of 1.8%), the subprime-induced credit market challenges in the U.S., combined with high commodities prices and rising uncertainty over the sustainability of the domestic economy's expansion weighed heavily on the BOJ's decision. BOJ Governor Toshihiko Fukui warned the Japanese economy is at risk to a slowdown if U.S. housing market problems drag on private consumption and capital investment. The BOJ is said to be watching global economic and financial developments closely. Governor Fukui expects the U.S. economy will soften in Q4, but says it should be able to avoid a serious downturn. Q3 GDP was driven by strong export growth (esp. to Asia and Europe) of 12% on an annualized basis. Consumer spending grew by only 0.3%, while housing investment fell by 7.8% due to stricter government regulation. In October the BOJ lowered its fiscal year (ending March) GDP outlook to 1.8%, from 2.1%, partially due to weakness in construction. Q2 GDP was downward revised to a 1.6% contraction, from -1.2% previously. The Nikkei 225 lost 0.5%, falling for an eighth-consecutive session (the longest in over three-years) to a 16-month low. The yen rose slightly against the US$ and is trading near a two-year high.

Sources: Bloomberg, MarketWatch, Wall Street Journal I, II
Commentary: Why is the Yen Carry Trade Unwinding? • Japan: 40-50% Chance of Impending Recession - Report • Why Japan is Still Hot
Stocks to watch: MTU, MFG, IX, TM, SNE, CAJ. ETFs: EWJ, ITF, FXY

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