Wed, Feb 16, 2011 - Page 10 News List

Bank of Japan becomes more upbeat, holds rate

AFP, TOKYO

The Bank of Japan (BOJ) yesterday upgraded its view of the economy for the first time in nine months amid accelerating global growth, but kept its easy monetary policy in place owing to persistent deflation.

The central bank’s board voted unanimously at the end of a two-day meeting to keep its key rate unchanged between zero and 0.1 percent. The bank’s decision to do so comes as it weighs the impact of a monetary easing program that includes a ¥5 trillion (US$60 billion) asset purchase scheme to boost liquidity.

“Japan’s economy is gradually emerging from the current deceleration phase,” the BOJ said in a statement, adding that Japanese exports and production were picking up thanks to global growth led by emerging markets.

The wording reflected the central bank’s more upbeat view compared to previous references to a “pause” in the recovery and marked the first time it has raised its assessment since May.

“As the growth rate of the global economy has started increasing again, led by emerging and commodity-exporting economies, Japan’s exports and production are showing signs of resuming an uptrend,” the statement said.

Some analysts warned that Japan’s reliance on external trade leaves it exposed to the strength of the yen, which reduces the competitiveness of its exports while making imports cheaper, encouraging deflation.

Japan’s real GDP slipped by an annualized 1.1 percent in the October-December quarter as the expiration of auto subsidies hit car sales, a new tobacco tax sapped cigarette demand and a surging yen hurt exports.

However, the contraction was smaller than expected, and there are hopes that the economy will pick up again in the current quarter on stronger export growth amid demand from key partners such as China.

“Although the latest GDP data showed a contraction, monthly data such as exports and production have been positive,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute.

“The BOJ upgrade is a fair reflection on the current status of the economy,” Shinke said.

Last month the central bank raised its forecasts for this fiscal year’s growth.

Companies such as Honda and Toyota saw their profits fall in the three months ended December, partly because of the decline in stimulus-driven domestic demand and a strong yen, but lifted full-year profit expectations. However, Japan remains mired in deflation. Falling prices prompt consumers to hold off on purchases in the expectation of further price drops, clouding future corporate investment.

The BOJ has pledged to maintain its loose monetary policy “in order for Japan to overcome deflation and return to a sustainable growth path with price stability,” or until consumer prices are seen to rise consistently. The central bank has previously forecast that consumer prices would rise in the next fiscal year that begins in April. It said yesterday that “the year-on-year rate of decline in the CPI is expected to continue slowing.”

December’s 0.4 percent slide in consumer prices marked the 22nd straight monthly fall, but also illustrated that the pace of decline was easing, lending support to the central bank’s view that prices would rise next fiscal year.

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