BOJ Says Japan’s Recession Easing, Holds Rate at 0.1%

BOJ Says Japan’s Recession Easing, Holds Rate at 0.1%

June 16 (Bloomberg) -- The Bank of Japan said the nation’s worst recession since World War II is easing after exports improved and industrial output rose the most in 56 years.

“Japan’s economic conditions, after deteriorating significantly, have begun to stop worsening,” the bank said in a statement in Tokyo today, after leaving the overnight lending rate at 0.1 percent. “In the coming months, Japan’s economy is likely to show clearer evidence of leveling out over time.”

The yen strengthened after the announcement, the central bank’s second consecutive upgrade to its monthly economic assessment. Still, Governor Masaaki Shirakawa may signal later today that it’s too soon to consider unwinding the bank’s policies of buying corporate debt and providing lenders with ample funds because the economy remains fragile.

“The BOJ is still cautious about the prospects for the economy and is still far away from an exit,” said Masaaki Kanno, chief economist in Tokyo at JPMorgan Chase & Co., who used to work at the central bank.

Japan’s currency gained to 96.41 per dollar at 2:40 p.m. in Tokyo from 96.74 before the announcement. The Nikkei 225 Stock Average slumped 2.8 percent, headed for its biggest drop since March 30, as a report on New York manufacturing damped optimism for a U.S. recovery.

The central bank said there are “continued high downside risks” facing Japan, citing developments in domestic and global financial conditions and the world economy.

G-8 Finance Ministers

Finance ministers from the Group of Eight nations said over the weekend that they need to begin considering how to roll back policies to counter the financial crisis as their economies show signs of recovering.

Atsushi Mizuno, a Bank of Japan board member, last month said central banks need to discuss how to “exit” their unconventional policy measures even though the global economy is still in a slump.

Since lowering the key rate to 0.1 percent in December, the central bank began to buy commercial paper and corporate bonds from lenders to channel cash to companies. It has also offered to lend to commercial banks limitlessly in exchange for sufficient collateral. The programs expire on Sept. 30.

Shirakawa will speak to the press at 3:30 p.m. in Tokyo.

Investor optimism that the economy is recovering has spurred an increase in government bond yields. The yield on Japan’s benchmark 10-year bond fell 2.5 basis points to 1.475 percent as of 1:08 p.m. in Tokyo. It reached an eight-month high of 1.56 percent on June 11.

Long-Term Rates

Rising long-term interest rates would boost borrowing costs for companies and consumers, threatening to quash the global economy’s budding rebound.

“If the Bank of Japan and other central banks want to lower long-term interest rates, they could say it’s too soon to think about an exit,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo, who is a former central bank official. He’s not related to the governor.

Reports since the first quarter, when gross domestic product shrank a record 14.2 percent, suggest the nation is rebounding from its worst recession since World War II.

Industrial production climbed 5.9 percent in April from a month earlier, the biggest gain since 1953. Exports have improved two months running and bankruptcies fell in May for the first time in a year. Both the central bank and the government last month raised their evaluations of the economy for the first time since 2006.

Replacing Inventories

Shirakawa has said the rebound is being driven by inventory replacements and fiscal measures and the bank’s focus is on whether the economy can keep growing should the labor market and wages deteriorate further.

“With inventory adjustments having proceeded both at home and abroad, economic activity will be greatly influenced by developments in final demand,” the bank said. It reiterated a forecast for the world’s second-largest economy to start recovering sometime between October and March at the earliest.

A lack of interest in the bank’s programs indicates lenders are able to borrow from financial markets, analysts say. For the first time, no lenders bid to sell their commercial- paper holdings to the central bank last week. Bids for the bank’s corporate bond purchases have also failed to reach offered amounts since the program began in March.

Sony Corp. last week sold the biggest amount of bonds in its history while Toyota Motor Corp. plans to increase debt sales from the initially planned amount.

Even so, the central bank will probably extend corporate operations beyond Sept. 30 “as a safety net,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. Policy makers may also consider increasing the bank’s monthly government bond purchases from 1.8 trillion yen ($18.4 billion) should financial-market turmoil re-emerge, she said.

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