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August 7, 2000: 11:51 a.m. ET
Bank of Japan's monetary policy meeting, set for Friday, worries investors
By Gordon Platt
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NEW YORK (CNNfn) - The Bank of Japan's monetary policy committee meets on Friday and analysts say there is a chance it could raise interest rates for the first time in a decade.
"It is a possibility that you cannot ignore," said Bob Lynch, currency strategist at Paribas.
"The market has adjusted to the credit concerns and the stress on the
Japanese banking system as a result of the Sogo bankruptcy," Lynch said.
"The timing may be right for a rate hike."
Bank of Japan Governor Masaru Hayami is itching to raise interest rates in Japan, analysts said. Hayami has made it clear that the zero interest rate policy was put in place as an emergency measure and that it is time to end it.
The yen perked up on Friday, partly on speculation that a Japanese rate hike could come as soon as this week.
Marc Chandler, chief currency strategist at Mellon Financial, said the yen's recovery, which appeared to falter early Monday, also was influenced by technical factors in the market and trader positioning.
"Short yen positions were squeezed out as the dollar pulled back from the
110-yen level," Chandler said. That level has been a difficult area of resistance for the strengthening dollar, acting as a ceiling blocking its further rise, he said.
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In Tokyo Monday, Prime Minister Yoshior Mori told a committee of the Diet that "the government will preserve the current fiscal and monetary policies until the economy returns to a genuine recovery phase."
Dennis Gartman, editor and publisher of The Gartman Letter, said, he cannot recall a more direct threat upon the independence of a Bank of Japan (BOJ) chairman.
"Hayami is walking a very slippery plank," Gartman said. He said it may be a month or so before the BOJ raises rates because of the intense political pressure on the central bank to wait for more evidence of a sustainable recovery before acting.
Consumer spending and prices are still declining, although the manufacturing sector has picked up. Japan's leading economic indicators, released Friday, rose to 56.3 in June from 40.0 in May.
Foreign investors are impatient at Japan's slow recovery, said analysts at Chase Securities. Frustrated, overseas investors have reduced their exposure to Japanese equities, curbing the yen's rise.
In the next month, Moody's Investors Service will decide whether to downgrade Japan's long-term debt. The key issue, the Chase analysts said, is whether the pace of future growth will enable the country to grow its way out of enormous public debt. A debt downgrade could weaken the yen.
Meanwhile, the euro has failed to respond to positive economic news in
Europe, analysts said.
"Things in Euroland are fine," said Lynch of Paribas. "The economy is doing nicely, but the euro has fallen victim to continued strength in the dollar. There has been no sustained support for the euro from positive fundamentals."
With the Euroland economy improving and inflation above its official target range, the European Central Bank is expected to raise rates in mid-September. Capital flows, however, do not favor the euro. Analysts said recent takeover activity indicates that the United States has attracted strong inward investment.
The dollar showed little reaction Friday to the weaker-than-expected July
U.S. employment report. Factoring out the 290,000 decline in census workers, the report was not all that weak, said Lynch of Paribas. The unemployment rate held steady near the cycle low at 4.0 percent, he noted, and wages were firm.
"A soft-landing economic background is good for the dollar," Lynch said. "The dollar has risen strongly since June on the improving economic outlook in the United States."
The employment report reduced the chances of a Federal Reserve rate hike on Aug. 22, when the Federal Open Market Committee meets, said Chandler of Mellon Financial.
Reaction was muted to the jobs data, he said, because the market already was leaning in the direction of expecting no rate hike this month.
Tuesday's report on U.S. productivity in the second quarter is expected to show a rise of 3.1 percent, up from 2.4 percent in the first quarter.
Analysts said rising productivity is helping to keep a lid on inflation.
The producer price index for July, to be released Friday, is forecast to rise 0.1 percent, following a 0.6 percent surge in June. The core rate, which excludes food and energy, is expected to rise 0.1 percent for July after falling 0.1 percent in June. 
--Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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