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BOJ Is Watching Land Prices for Excess, Fukui Says (Update4)
By Mayumi Otsuma

March 27 (Bloomberg) -- Bank of Japan Governor Toshihiko Fukui said he's closely monitoring land prices after a report showed gains of as much as 46 percent in parts of Tokyo last year.

``We aren't yet in a situation in which land-price gains warrant concern of excessiveness, but we'd like to keep a close watch on them,'' Fukui said in parliament today. ``Rising land prices won't automatically prompt a rate increase.''

Concern that borrowing costs at 0.5 percent will fuel land- price gains could prompt the Bank of Japan to raise interest rates in the first half of this year. The central bank wants to avoid a repeat of an asset-price bubble, the collapse of which in the early 1990s led to more than a decade of stagnation in the world's second-largest economy.

``Land prices are rising, and that's spreading to other big cities'' outside Tokyo, said Hiromichi Shirakawa, a former Bank of Japan official and now chief economist at Credit Suisse in Tokyo. ``This may increase chances of a rate increase before the July upper house election.''

Commercial land prices in Japan's three biggest cities rose 8.9 percent in 2006, the government said on March 22, as investors were lured by large-scale developments including Mitsui Fudosan Co.'s Tokyo Midtown project, which opens this week.

``We've got a clear impression that the recovery of land prices is becoming evident mainly in large cities,'' Fukui said, adding that gains in Tokyo, Osaka and Nagoya were ``prominent.''

Omotesando Hills

Commercial land in and around the three cities rose for a second straight year, after gaining 1 percent in 2005, the government said. Residential land prices increased for the first time in 16 years, up 2.8 percent.

The steepest gains were recorded in areas near Omotesando Hills, a retail and residential development in central Tokyo that opened on Feb. 11 last year. Commercial and residential land prices both rose as much as 46 percent near the project.

Japan's two largest developers will open developments in central Tokyo in coming weeks. Mitsui Fudosan's Tokyo Midtown project includes the city's tallest building. Mitsubishi Estate Co. is scheduled to open a new 42-story skyscraper in front of Tokyo Station in April.

``The recovery in land prices generally reflects the improving outlook for the economy and higher expectations for profits that can be made by utilizing land,'' Fukui said.

Land prices nationwide rose for the first time in 16 years in 2006 as gains in Tokyo, Osaka and Nagoya compensated for drops elsewhere in the country, last week's report showed. Japan's commercial and residential land values are still half the levels reached in 1988.

Some Areas `Overheating'

Finance Minister Koji Omi said last week that the gains don't signal another bubble is emerging. Economic and Fiscal Policy Minister Hiroko Ota said some areas are ``overheating'' and the government will ``watch developments closely.''

The central bank left the key overnight lending rate unchanged last week, a month after doubling it to 0.5 percent, the second increase in six years. Fukui said the bank will gradually raise rates as the economy keeps expanding and prices rise, adding that borrowing costs will be held at very low levels for the time being.

``If the economy continues to show positive developments, we will gradually adjust interest-rate levels,'' he said. Japan's key rate remains the lowest among major economies.

Close to Peak

Not all economists agree that the land-price report will accelerate the central bank's plans to raise interest rates.

``Real estate prices in central areas of major cities may be close to the peak and have little room to rise further,'' said Takehiro Sato, chief economist at Morgan Stanley Japan Securities Ltd. in Tokyo. ``We expect the BOJ to remain hesitant about tightening for the rest of 2007, largely because of subdued movements in prices in general.''

Governor Fukui said Japan's core consumer prices may ``hover around zero'' in coming months because of cheaper oil. Core prices will stay on a rising trend in the long run as the economy keeps expanding, he added.

Core prices probably fell 0.1 percent in February after failing to rise in January, according to the median estimate of 36 economists surveyed by Bloomberg News. The government will release the figures on March 30 at 8:30 a.m. in Tokyo.

The governor said the central bank's policy shouldn't be bound too much by the board members' understanding of price stability. The bank's nine board members said last year that they consider consumer prices to be stable as long as they remain in the range of zero to 2 percent.

Should the bank be too influenced by short-term price changes, that could have a negative effect on monetary policy, Fukui said.