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Japan lowers targets for extra cash in financial system

Japan's central bank yesterday relaxed the targets set for extra cash in the financial system, a move that indicates a tentative step toward tighter monetary policy amid signs of a gradual economic recovery.

The Bank of Japan policy board voted at the end of a two-day meeting to allow the amount of liquidity pumped into the system to temporarily fall below the bank's target range if necessary.

The action was expected and leaves unchanged the target for liquidity, or commercial banks' account balances at the Bank of Japan, at between ?30 trillion (US$280 billion) to ?35 trillion.

Some economists say the move is an initial step on a long path toward tightening of monetary policy as Japan's economy slowly recovers and deflation pressures gradually ease.

Japan, which has suffered stagnation for more than a decade, also suffers a continual decline of prices known as deflation, which deadens economic activity by bringing down prices and paychecks.

The nation's central bank has kept interest rates virtually at zero for about four years in an attempt to encourage a rebound in the world's second largest economy.

It has also maintained ample extra cash in the financial system. But in recent months, a fall in demand for cash by commercial banks, as fears of financial system instability have ebbed, has made it increasingly difficult for the bank to maintain its target band.

The economy recorded its strongest pace of expansion in a year during the January-March quarter, although officials warn against too much optimism.

Later yesterday, the Bank of Japan left its overall core economic assessment in May unchanged from April, repeating that the nation's recovery continues.

But the central bank in its monthly report upgraded its assessment on industrial production, saying output is increasing. Last month, it had said industrial production remained flat.
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