Friday, the Bank of Japan announced its decision to maintain its key interest rate at a level close to zero and raised its economic assessment given the recent improvements in the economic conditions. Meanwhile, the economy is in deflation, the government announced for the first time in nearly three years.
The Policy Board, led by Governor Masaaki Shirakawa, unanimously decided to leave the uncollateralized overnight call rate unchanged at 0.1% as expected. The central bank said it would maintain the extremely accommodative financial environment and will provide steady support for Japan's economy to return to a sustainable growth path with price stability.
Upgrading its assessment, the BoJ said Japan's economy is picking up, although the momentum of self-sustaining recovery in domestic private demand remains weak. Last month, it said the world's second-largest economy has started to pick up. The central bank said the pace of improvement of the economy is likely to remain moderate until around the middle of fiscal 2010.
In October, the central bank raised its economic outlook to show a contraction of 3.2% in fiscal 2009 compared to a 3.4% fall estimated in July. In fiscal 2010, real GDP growth is seen at 1.2%, up from July's forecast of 1%.
Japan's GDP grew 4.8% on an annualized basis in the third quarter following a 2.7% growth in the second quarter, data showed earlier in the week. On Thursday, the Paris-based Organisation for Economic Co-operation and Development said the Japanese economy is expected to grow by 1.8% and 2% in 2010 and 2011 respectively.
Today, the central bank said while there are some upside risks, such as economic developments in emerging and commodity-exporting economies, there are still downside risks, although somewhat diminished. The bank said downside risk factors include the possible consequences of balance-sheet adjustments in the United States and Europe or potential changes in firms' medium to long-term growth expectations. With regard to prices, the central bank said the year-on-year rate of decline in the consumer price index excluding fresh food is likely to moderate as the effects of the changes in the prices of petroleum products abate. According to the central bank's forecast in October, the CPI excluding fresh food, would fall 1.5% in fiscal 2009 and would drop 0.8% in fiscal 2010 and a 0.4% decline in fiscal 2011.
On Friday, the government released its the monthly statement from the Cabinet Office, which said Japan is in deflation. "The Japanese economy is in a mild deflationary phase," the report said. This is the first government announcement of deflation since mid-2006.
According to DBS Bank, such an assessment would make it that much harder for the BOJ to exit its ultra-accommodative monetary stance. Economists at the Singapore-based bank currently expects interest rate normalization to begin in Japan in the fourth quarter of 2010, about a quarter after most of Asia's central banks do so.
Elsewhere on Friday, Japan's Deputy Prime Minister Naoto Kan and Finance Minister Hirohisa Fujii expressed concerns about a rising danger of deflation and Fujii urged the BoJ to act appropriately. Yesterday, the OECD warned lingering deflation in the economy and said an increase in BoJ's bond purchases would help in battling deflation.
However, the central bank said there is a possibility that inflation will rise more than expected due to an increase in commodity prices brought about by higher growth rates in emerging and commodity-exporting economies. This assessment is based on the view that medium to long-term inflation expectations remain stable. At the same time, the BoJ sees a risk that the rate of inflation might decline due to a fall in medium to long-term inflation expectations.
Last month, BoJ policymakers decided to stop outright purchases of commercial papers and corporate bonds at the end of 2009 as the central bank's assessment showed a marked improvement in conditions. But, the central bank may be forced to buy more government bonds as the rises in bond yields undermine recovery. Fujii said today that the increase in bond yields may counteract government efforts to help small businesses.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.