Japan’s central bank kept its benchmark interest rate unchanged yesterday, acknowledging worries about falling prices and other risks to the nation’s still fragile economic recovery.
The Bank of Japan’s (BOJ) policy board decided unanimously at the end of a two-day meeting that it would keep the overnight call rate at a superlow 0.1 percent. The rate hasn’t changed since December 2008.
The bank said in a statement that the world’s No. 2 economy showed some signs of recovery on the back of an overseas turnaround with exports and production increasing, but it acknowledged that Japan was still fighting continually declining prices — known as deflation.
Also weighing on the economy is the surging yen, which erodes the value of overseas earnings for Japanese exporters, a key part of the economy. The dollar has been trading at ¥85 levels, which is close to a 15-year high for the Japanese currency.
“The bank’s baseline scenario projects that the economy is likely to be on a recovery trend,” the BOJ said. “The bank recognizes that Japan’s economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability.”
Hiroshi Watanabe, economist at Daiwa Institute of Research in Tokyo, said the BOJ avoided a direct reference to the dangers of the surging yen as it can do little to reverse the currency’s strength, and a reference could even fan such fears.
“The Bank of Japan kept things on hold this time because it still wants to keep some options open for later action,” he said.
The bank also wants to be ready to act if the US Federal Reserve takes action to jump start the US economy, the yen rises further or Japanese stock prices plunge, Watanabe said.
The Fed was set to meet later yesterday and was widely expected to leave its key lending rate between zero and 0.25 percent, where it has been since December 2008, but could take some other kind of action to add liquidity to financial markets.
Separately, the Japanese Cabinet Office released a report yesterday giving its assessment of the economy, which noted improved exports, corporate profits and consumer spending.
However, it said industrial production was picking up only moderately, toning down its assessment from the previous month.
Last month, the central bank raised its forecast for Japan’s economic growth for the year through March next year to 2.6 percent from 1.8 percent, reflecting improved demand for exports from the US and developing nations like China.
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