May 23 (Bloomberg) -- Bank of Japan policy makers said they need to monitor consumers' inflation expectations as prices increase at the fastest pace in a decade, minutes today showed.
``Consumers' inflation expectations were rising, reflecting the ongoing rise in the price of daily necessities, and this warranted attention,'' some members said at the April 8-9 policy meeting, according to the minutes released today in Tokyo. A few members said rising prices have damped consumer sentiment.
Since the meeting, the central bank cut its growth forecast, raised its prediction for inflation, and shelved a policy of gradually raising interest rates. Governor Masaaki Shirakawa told parliament yesterday that costlier energy and raw materials will erode corporate profits and household incomes and that may force companies and consumers to pare spending.
``If you're a central bank you've got to be worried when you see such a pickup in inflation expectations,'' said Richard Jerram, chief Japan economist at Macquarie Group Ltd. in Tokyo. ``In the short term, they want to be comfortable with the cyclical outlook, but once you get into next year you could see reasonably aggressive tightening.''
The yen traded at 104.13 per dollar at 9:49 a.m. in Tokyo from 104.04 before the minutes were published. The yield on Japan's 10-year bond rose 4 basis points to 1.705 percent.
Some 86.2 percent of households predict prices will rise a year from now, the second-highest proportion on record, a government report showed last week.
Worldwide Inflation
The seven board members agreed that the risk of higher inflation worldwide is increasing because of rising prices of commodities and crude oil, according to the minutes. They also concurred that the increase in energy and raw-materials costs will cause Japan's economy to slow ``for the time being'' before returning to a ``moderate growth path.''
Crude oil exceeded $135 a barrel for the first time yesterday. Japanese companies' pretax profits will fall 5 percent in the year ending March 2009, ending seven years of growth, Shinko Research Institute data showed this week.
The members also agreed that ``downside risks'' for the U.S. economy are rising and the outlook for global growth is ``uncertain.'' Financial markets around the world remain volatile, they said.
``Risk factors have been increasing both at home and abroad,'' the policy makers said. The central bank must closely examine ``both upside and downside risks'' to Japan's economy when setting policy, they said.
BOJ's Outlook
The central bank dropped a call for gradual rate increases in its twice-yearly outlook on April 30 and cut its estimate for this fiscal year's expansion to 1.5 percent from 2.1 percent. It said consumer prices excluding fresh food will climb 1.1 percent, raising its inflation projection from 0.4 percent.
Core consumer prices rose 1.2 percent in March from a year earlier. Gains probably eased in April, though prices will keep rising as a trend, one board member said.
The Bank of Japan has kept borrowing costs unchanged since February 2007, when it doubled the overnight lending rate to 0.5 percent. The rate remains the lowest in the industrialized world.
Only two of 31 economists surveyed by Bloomberg News predict the bank will raise rates this year, with the remaining 29 expecting no change.
The International Monetary Fund said this week that the central bank's policy represents a ``wait-and-see attitude.'' That's the ``appropriate stance'' to safeguard growth, said Daniel Citrin, IMF deputy director and mission chief for Japan.
Shirakawa was appointed governor of the central bank on April 9, while the policy meeting was under way. He had been acting chief since March 20, after the term of his predecessor, Toshihiko Fukui, expired and the opposition blocked the government's first two choices for the role. Two positions on the nine-member policy board remain unfilled.
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