BOJ May Keep Rate at 0.1% Ahead of Outlook Report

April 30 (Bloomberg) -- The Bank of Japan will probably keep the benchmark interest rate unchanged and debate whether to expand a credit program at a board meeting today as it gauges the strength of the recovery and outlook for deflation.

Governor Masaaki Shirakawa and his colleagues will hold the key interest rate at 0.1 percent, all 16 economists surveyed by Bloomberg News said. Thirteen said they expect the board to refrain from adding funds to the banking system.

BOJ policy makers have signaled over the past month that they may raise their projections for gross domestic product and prices in a twice-yearly outlook report later today. Any upgrade won’t prevent the bank from considering additional monetary stimulus as politicians press it to do more ahead of a July election, according to economist Junko Nishioka.

“Even if the BOJ stands pat this time, it’s widely expected to retain the option of additional easing,” said Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “Beating deflation and propping up economic growth through cooperation between the bank and the government will remain as a focal issue.”

The central bank is expected to announce its policy decision early afternoon and release its economic forecasts at 3 p.m. in Tokyo. Shirakawa will speak to the press at 3:30 p.m.

Economic Data

Government figures published today point to a moderate recovery: Industrial production rose 0.3 percent in March from a month earlier, less than the 0.8 percent median estimate of economists surveyed. The unemployment rate unexpectedly climbed to 5 percent, and consumer prices excluding fresh food slid 1.2 percent, the 13th straight drop.

Meanwhile household spending advanced 4.4 percent last month, the fastest pace since 2004, according to Bloomberg data. A report earlier this week showed retail sales climbed 4.7 percent, the biggest increase in 13 years.

Shirakawa told lawmakers this month that he sees increasing “positive signs” for prices. Deputy Governor Kiyohiko Nishimura said in a speech last week that “beams of light” are visible toward overcoming deflation.

The Nikkei 225 Stock Average gained 1.4 percent at 9:17 a.m. in Tokyo. The yen traded at 93.97 per dollar from 94.03 late yesterday. The yield on Japan’s 10-year bond fell half a basis point to 1.28 percent.

Inflation Outlook

BOJ policy makers will predict an inflation rate of at least zero for the year ending March 2012, up from the current estimate for consumer prices to drop 0.2 percent, according to 14 of the 16 economists.

Politicians may not be satisfied with any upgrade to the BOJ’s inflation outlook. Finance Minister Naoto Kan last week called for price gains of as much as 2 percent and the ruling Democratic Party of Japan this month said it may include an inflation target in its platform for the upper house election.

The International Monetary Fund said last week that the BOJ must remain open to more monetary easing to beat deflation.

“The BOJ will probably have to face up mounting pressure as the election approaches,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “For politicians, it’s easy to blame the central bank for lingering deflation and stagnant economic growth, and by doing that they can show the public they’re taking some action.”

Lending Program

The central bank introduced its bank lending program in December after the yen advanced to a 14-year high against the dollar. It doubled the facility, which provides three-month loans at 0.1 percent, to 20 trillion yen last month.

While Shirakawa said the move was aimed at spurring the recovery, board members Miyako Suda and Tadao Noda opposed the decision, saying it wasn’t justified given the economy’s improvements.

Europe’s mounting debt woes may damp the Bank of Japan’s growing optimism and lead it to consider more easing, said economist Mari Iwashita.

“There is a risk that overseas factors, over which Japanese policy makers can exercise little control, will push down stocks and drive up the yen,” said Iwashita, chief market economist at Nikko Cordial Securities in Tokyo. “Should that happen, it could be a trigger for additional monetary easing.”