Japan’s central bank yesterday raised its forecasts for Japan’s growth the 2010 fiscal year and for consumer prices, while leaving its key rate near zero in an ongoing battle with deflation.
The Bank of Japan’s decision to hold rates comes as it weighs the impact of a monetary easing program that includes a ￥5 trillion (US$61 billion) asset purchase scheme to lower borrowing costs and tackle deflation.
The bank also maintained its earlier forecast that consumer prices would continue falling until the start of the 2011 fiscal year in April, but raised its inflation expectations for the 2011 fiscal year to reflect rising commodity prices.
“Japan’s economy still shows signs of a moderate recovery, but the recovery seems to be pausing,” the central bank said in a statement, keeping its broad assessment unchanged.
The policy board voted unanimously at the end of a two-day meeting to leave its key rate in the 0 percent to 0.1 percent range.
Japan remains mired in crippling deflation, as falling prices prompt consumers to hold off on purchases in the expectation of further price drops, clouding future corporate investment.
The bank stuck to its view deflation will end in fiscal 2011, but said the core consumer price index, excluding volatile food items, would rise 0.3 percent, instead of the previously forecast 0.1 percent, because of higher commodity prices.
And it maintained its earlier projection for prices to increase 0.6 percent in fiscal 2012, as the economy gradually overcomes deflationary pressures that have dragged down growth.
“The bank’s baseline scenario predicts that Japan’s economy is expected to gradually overcome the deceleration in the pace of improvement and return to a moderate recovery path,” the bank said in a statement. “The growth rate of the global economy is likely to start increasing again, led by emerging and commodity exporting economies.”
The bank also raised its growth assessment for fiscal 2010 to 3.3 percent, from an earlier forecast of 2.1 percent despite its own assessment that exports were “somewhat weak.”
The government last week raised its economic assessment for the first time in seven months, citing signs of exports being supported by firm demand in Asia.
While economists expect a slight contraction in the final quarter of last year, the reviving regional demand picture is expected to keep Japan’s growth ticking along at a modest pace next year.
However, analysts said that the bank may yet be forced to ease policy further this year, such as by expanding its asset-purchasing program.
The bank’s “economic forecasts are highly dependent on positive developments overseas and look increasingly over-optimistic,” research consultancy Capital Economics said. “While monetary policy may be on hold for now, we continue to expect it to be loosened further by year-end.”
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