BOJ Keeps Rate at 0.1%, Says Recovery Remains Intact

BOJ Keeps Rate at 0.1%, Says Recovery Remains Intact

April 7 (Bloomberg) -- The Bank of Japan refrained from easing monetary policy and said the export-led recovery remains intact even as deflation remains a “critical challenge.”

Governor Masaaki Shirakawa and his board left the benchmark interest rate at 0.1 percent by a unanimous vote, the central bank said in a statement today in Tokyo. “High growth in emerging economies” is propelling exports and production, they said, while leaving their overall economic view unchanged.

Reports since policy makers doubled a lending program for banks last month show a revival in sales abroad is instilling confidence in businesses and consumers even as prices and wages fall. Prime Minister Yukio Hatoyama’s government is likely to exert more pressure on the central bank to support the economy as a July election approaches, said economist Seiji Shiraishi.

“The ruling party isn’t softening its pressure on the BOJ at all,” Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo, said before the decision. “There is a chance that the bank will implement additional policy easing measures between April and June.” The yen traded at 94.19 per dollar at 1:19 p.m. in Tokyo from 94.20 before the announcement. The currency has weakened 4 percent in the past month, improving the earnings outlook for exporters. The Nikkei 225 Stock Average climbed 0.5 percent. The yield on Japan’s 10-year bond rose half a basis point to 1.4 percent, matching a five-month high.

The rate decision was expected by all 21 economists surveyed by Bloomberg News. None of 16 analysts in a separate questionnaire expected any policy change three weeks after the board expanded the credit facility, which offers lenders three- month loans at 0.1 percent, to 20 trillion yen ($213 billion).

Led by Exports

Policy makers cited exports as a driver of the nation’s expansion, after describing stimulus measures as the main reason for the rebound in previous months. They were more optimistic about capital spending, describing it as “leveling out” and dropping the phrase “on the whole.” “Japan’s economy has been picking up mainly due to improvement in overseas economic conditions and to various policy measures, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand,” the central bank said.

The board also inserted a sentence saying business sentiment “has been improving.” The central bank’s quarterly Tankan survey last week showed confidence among large manufacturers climbed to the highest since September 2008.

Asian Demand

Other reports since the March meeting have added to evidence that the nation is extending its recovery from the worst postwar recession. Exports rose at the fastest pace in 30 years in February, mainly thanks to Asian demand, and the jobless rate held at 4.9 percent, the lowest since March 2009.

The resurgence in demand is improving prospects for companies including Fuji Electric Holdings Co., which may beat its earnings forecast, according to President Michihiro Kitazawa. Cost savings and demand for chips used in automobiles in Japan prompted the company to reverse plans to close two domestic factories.

“As long as the U.S. holds up and China holds up then I think Japan will hold up as well,” Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney, said on Bloomberg Television. “The trouble is unless they do something about this ongoing deflation issue then they’ll be relegating themselves to relatively constrained growth and this risk they sort of flirt in and out of recession going forward.”

Hampered by Deflation

Consumer prices excluding fresh food, the BOJ’s preferred measure, declined for a 12th month in February. Deflation can hamper economic growth by eroding profits, prompting companies and consumers to delay spending, and increasing the real value of debt. “The pace of improvement in the economy is likely to be moderate for the time being,” the central bank said, modifying its earlier evaluation predicting that growth would remain moderate until the middle of fiscal 2010. “It is a critical challenge for Japan’s economy to overcome deflation and return to a sustainable growth path with price stability.”

Shirakawa and his board will hold their next gathering on April 30 to review economic and inflation forecasts.

Political pressure on the central bank continued last week as some 100 legislators of the ruling Democratic Party of Japan formed a group to urge the bank to act on deflation. Financial Services Minister Shizuka Kamei, who heads a junior party of the ruling coalition, yesterday called for stimulus spending of at least 11 trillion yen to rid the nation of falling prices.

“Hatoyama’s Cabinet has set a challenge for the BOJ to eradicate deflation within the year,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “That means the bank will have to confront political pressure until the goal is met.”

Shirakawa is scheduled to brief the press at 3:30 p.m. today. This week’s gathering was the first for Ryuzo Miyao, an economics professor at Kobe University, who on March 26 became the eighth member of the policy board.

source: bloomberg.com