Japan, SKorea keep rates steady, see some hope

[August 11, 2009]  TOKYO (AP) -- Central banks in Japan and South Korea kept their interest rates steady Tuesday and maintained cautious outlooks on their export-dependent economies -- although both pointed to gradual signs of recovery.

The Bank of Japan's policy board voted unanimously to keep the overnight call rate unchanged at 0.1 percent at the end of a two-day meeting. In neighboring South Korea, the central bank left interest rate at a record low 2 percent. Both decisions were expected.

Japan's central bank said "economic conditions have stopped worsening" but warned unemployment remained high and consumer spending was lagging. South Korea's central bank noted "uncertainty as to the economic growth path."

Both economies are suffering from rising unemployment amid falling demand for their autos, electronics and other exports.

Japan's jobless rate reached a six-year high of 5.4 percent in June, even as manufacturing shows signs of recovering. In South Korea, the unemployment rate, when adjusted for seasonal factors, rose to 4 percent, the highest since 2001.

Bank of Japan Gov. Masaaki Shirakawa noted that consumer spending was up for green cars and flat-panel TVs, which have been boosted by government incentives, but remained sluggish at department stores and supermarkets.

"The improved spending has been limited in scope," he told reporters. "Even if we are undergoing a recovery, we cannot be certain of its strength."

Hiroshi Shiraishi, economist at BNP Paribas in Tokyo, said the BOJ was unlikely to raise interest rates for some time because of worries about the rebound running out of steam in coming months.

The recent good news about an improvement in manufacturing could be short-lived, he said, because it was driven by the temporary effects of government stimulus measures and companies around the world rebuilding severely depleted inventories.

"We are expecting the rebound to slow down somewhat later this year or early next year," Shiraishi said.

The Bank of Japan has kept its key rate unchanged at near zero since December, when it cut the rate from 0.3 percent. The Cabinet Office's monthly economic report Tuesday said the economy was "picking up" but remained in a "difficult situation."

The Bank of Korea, meanwhile, has slashed the benchmark seven-day repurchase rate six times since early October to help the economy emerge from its worst slowdown since the 1997-98 Asian financial crisis.

Daniel Melser, senior economist at Moody's Economy.com, believes that a rate hike is likely at least six months away for South Korea.

"The most likely course of action is that the Bank of Korea will wait until the economy fully recovers, and in particular, they will wait until the unemployment rate stops increasing," he wrote in a commentary on the decision.

Rising global demand, especially from China and other emerging markets, is gradually boosting manufacturing again although levels are still below what they were a year earlier.

Tokyo's stock market edged higher, with the benchmark Nikkei 225 stock average rising to a 10-month high as investors awaited for the outcome of a Fed meeting and U.S. July retail sales data. South Korea's benchmark Kospi index rose a slight 0.2 percent to finish at a one-year high of 1,579.21.

[Associated Press; By YURI KAGEYAMA]

AP Business Writer Kelly Olsen in Seoul contributed to this report.

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