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Wednesday, Aug. 12, 2009

BOJ leaves rate unchanged on deflation fears

Staff writer

As expected, the Bank of Japan left the key interest rate unchanged Tuesday at around 0.1 percent amid continued concerns about deflation, even though exports and production have shown signs of recovery.

The eight-member BOJ Policy Board wrapped up its two-day meeting by voting unanimously to keep the uncollateralized overnight call rate at its current level.

The BOJ last month extended emergency measures to support corporate financing beyond their September deadline to the end of the year.

"Japan's economic conditions have stopped worsening," the central bank said in a statement, leaving its assessment of the current situation unchanged from last month. "The outlook is attended by a significant level of uncertainty stemming mainly from developments in overseas economies and global financial markets."

While public investment is increasing and exports and production are picking up, the BOJ said businesses' fixed investment is declining sharply mainly due to weak corporate profits.

Private consumption also remains generally weak amid the worsening employment and income situation, and the year-on-year rate of decline in the consumer price will likely accelerate, it said.

The BOJ, however, reiterated that the economy will start recovering from the latter half of this fiscal year.

Hiromichi Shirakawa, chief economist at Credit Suisse, also said the economy appears to be on the mend.

"Exports and industrial production have bottomed out and are now on the recovery phase," Shirakawa said.

After bottoming out in the January-March period, the economy has been growing and will continue to do so at least until the January-March period as exports to China and the U.S. keep picking up, he said.

Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co., predicted the economy will continue to recover as overseas demand revives, and corporate investment in plants and equipment, now sluggish, will also rise next year.

Shirakawa, however, cautioned against optimism, saying the Chinese economy is at risk of deceleration in around the second half of next year.

To support the economic recovery, Shirakawa suggested the government maintain its expansionary fiscal policy and the BOJ keep its financial easing measures through the end of next year.

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The Japan Times

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