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Wednesday, Jan. 27, 2010

Wary of deflation, BOJ maintains near-zero interest rate


Staff writer

The Bank of Japan said Tuesday it will keep its key interest rate unchanged at just above zero, as widely expected, and reiterated its determination to fight deflation.

The seven-member Policy Board unanimously voted to maintain the uncollateralized overnight call rate at around 0.1 percent.

"The bank recognizes that it is a critical challenge for Japan's economy to overcome deflation and return to a sustainable growth path with price stability," the BOJ said in a statement. "To this end, the bank will continue to consistently make contributions as the central bank" and will maintain "the extremely accommodative financial environment."

The BOJ also maintained that the economy is picking up thanks to the government's stimulus measures as well as rises in exports and production stemming from increased demand in emerging economies.

Reviewing its forecast for economic growth and consumer prices, the BOJ said it expects real gross domestic product to rise 1.3 percent in the fiscal year starting in April, higher than its 1.2 percent growth forecast made in October.

The central bank said it expects the consumer price index excluding fresh food to drop 0.5 percent in fiscal 2010, compared with the 0.8 percent fall it forecast in October.

Some analysts shared the BOJ's forecasts, predicting the economy will gradually recover for months to come.

Given the currently stable dollar-yen rate, Minoru Nogimori, an economist at Nomura Securities Co., said it was appropriate for the BOJ to maintain its benchmark interest rate.

While companies may see their profits affected by a stronger yen, Nogimori predicted the economy will improve moderately toward midyear.

Hideo Kumano, chief economist at Dai-ichi Life Research Institute, predicts economic growth in fiscal 2010 will be modest as domestic demand, especially the employment situation, will remain sluggish.

"As wages of regular workers and employment situations are tough, we have not yet got out of the deflationary structure," Kumano said.

He noted there are downside risks as some emerging countries will be increasingly concerned with their bubble economies later in the year.

Kumano said the government should come up with policies to help Japanese companies compete globally by accommodating them with measures such as tax cuts and deregulation.



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