Bank of Japan keeps key rate between zero and 0.1%

Wednesday, 22 December 2010 00:01 - - {{hitsCtrl.values.hits}}

TOKYO, (AFP) - Japan’s central bank on Tuesday kept its key rate unchanged between zero and 0.1 percent in a widely expected move as it examines the impact of earlier measures to boost a faltering economy.

The central bank’s board made the unanimous decision at the end of a two-day meeting, warning that a fragile recovery from deep recession was “pausing”.

“The bank will continue to carefully examine the outlook for economic activity and prices, and take policy action in an appropriate manner,” the BoJ said in a statement released together with the rate announcement.

The bank’s decision to hold rates followed its move in October to adopt a near zero rate policy and a five trillion yen (60 billion dollar) asset purchase scheme to lower borrowing costs and help tackle deflation.

While the central bank’s quarterly Tankan survey of business sentiment last week showed confidence had weakened for the first time in nearly two years, the decline had been less than expected by many economists.

However, the bank warned that “as for private consumption, demand for some goods has suffered a reverse after the sharp increase seen previously”.

Export growth has slowed in recent months and industrial production has fallen on weakening overseas demand, while the expiration of government incentives for environmentally friendly cars has also hit demand at home.

“Production has recently declined slightly and business sentiment has also been somewhat weak, particularly in the manufacturing sector,” the BoJ said.

Japan, which heavily relies on exports of cars, electronics and machines, has been battered by a strong yen, which makes its goods less competitive abroad and erodes companies’ overseas profits when repatriated.

The yen has touched 15-year highs against the dollar in recent weeks.

Japan remains mired in crippling deflation, as falling prices prompt consumers to hold off on purchase decisions in the expectation of further price drops, clouding future corporate investment.

The strong yen effectively makes imports cheaper, therefore reinforcing the deflationary cycle.

While the BoJ acknowledged that prices continue to decline on a year-on-year basis “due to the substantial slack in the economy as a whole,” it said the pace of decline had continued to slow.