Bank of Japan Rate Decision Shows Economy Improving

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TOKYO -- Perhaps last week's collapse of department store operator

Sogo

took a toll. Or it could be that household consumption still remains weak. Most likely, however, it was a combination of both.

The

Bank of Japan

voted today to keep unchanged its zero-interest-rate policy, signaling to the stock market that the possibility of a rate rise won't come for at least another few months.

In an unusual move, the central bank issued a statement explaining its decision. Usually, investors don't get to see what the board members discussed at a meeting until the minutes are released a couple of months down the line. With the market very concerned over the future course of interest rates, however, the Bank of Japan seemed to be playing it safe by explaining its decision. BOJ governor

Masaru Hayami

, afterall, had been threatening to raise rates.

The statement from the BOJ said the economy was gradually improving and deflationary pressures are easing. However, some board members wanted to see a solid jump in personal spending and employment conditions before abolishing its 17-month old policy. The statement also said the "board needed to see how the commencement of reconstruction proceedings of Sogo could affect market development and business sentiment." Sogo, which filed for bankruptcy under court protection with $18 billion in liabilities, is Japan's second largest bankruptcy.

Peter Morgan, economist at

HSBC Securities

, thinks the failure of Sogo was not a factor in the bank's decision today since the statement specifically mentioned household spending. "This implies that the BOJ might have not raised rates even if Sogo had not gone bankrupt," he says.

That said, most economists, including Morgan, believe the BOJ will hike the overnight call loan rate, which is akin to the

fed funds rate, by 25 basis points sometime in the fall to around 0.27%. However, it is also widely believed the BOJ will not hike rates that much further since there are no inflationary concerns at this point.

And that's great news for the stock market. Although the

market closed before the BOJ's decision was announced, the key

Nikkei 225

index rose 143.93 points to 17,286.83 because traders assumed the bank would stay put. With the official result now out, along with the bounce seen in U.S. shares last week, many traders say the market finally has room and reason to rally. The first target is the Nikkei 255's key psychological resistance of 18,000.00, a level most traders say will be breached by the end of the week.