Fed signals higher interest rates after 25bps cut

Some BOJ Members Said Low Rates Caused Subprime Rout (Update1)

By Mayumi Otsuma

Nov. 5 (Bloomberg) -- Bank of Japan board members said the U.S. subprime mortgage collapse was caused by keeping interest rates too low, signaling their intention to increase the world's lowest borrowing costs to prevent investment bubbles.

Some of the nine members said a ``long period'' of global monetary easing had led to ``excessive financial behavior'' that resulted in the U.S. home-loan crisis, according to minutes of the Sept. 18-19 board meeting published today in Tokyo.

The Bank of Japan is concerned that keeping its key interest rate at 0.5 percent risks seeding future asset bubbles. The subprime crisis was caused in part by investors who wanted higher returns amid low global interest rates buying securities linked to loans to people with poor credit histories. Defaults on the loans caused a shortage of credit and led to losses at banks including Citigroup Inc. and Merrill Lynch & Co.

The Bank of Japan is saying ```look, the risks we're talking about, that's what hit the U.S.,''' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``All good central banks are forward-looking but they're caught between the short-term circumstances and long-term risks.''

The central bank last week kept its benchmark rate on hold and cut its forecasts for this year's economic growth and inflation. Governor Toshihiko Fukui said ``downside risks'' for the Japanese economy are rising as U.S. growth slows and financial markets remain volatile.

`Not a Slogan'

Still, Fukui said last week that Japan's ``very low'' rates need to rise gradually as the economy expands. Failure to do so would encourage excessive investment that may lead to swings in economic growth, he said on Oct. 31.

``This is not just a slogan. We're serious about this view,'' he said.

Most members at the September meeting said they're watching the employment situation, home prices and banks' willingness to lend to determine the strength of U.S. consumer spending.

A few members said they need to carefully check whether financial markets and the U.S. economy will affect the bank's outlook for Japan's growth and inflation, the minutes show.

Policy makers at the meeting agreed on their basic view that Japan's interest rates need to be raised gradually according to developments in the economy and prices.

One member said the bank has time to examine the influence of financial-market turmoil and global economic growth on the Japan economy.

Another board member said the bank shouldn't hesitate to raise interest rates as long as it's confident Japan's economy will keep growing in line with policy makers' predictions.