Bank of Japan keeps key interest rate unchanged

[September 17, 2009]  TOKYO (AP) -- The Bank of Japan upgraded its assessment of the world's second-largest economy and held its key interest rate unchanged at a near-zero 0.1 percent Thursday as it tries to nurture a recovery.

The unanimous and widely anticipated decision on the overnight call rate came at the end of the central bank's two-day policy board meeting.

"Japan's economic conditions are showing signs of recovery," the bank said in a more optimistic tone than its previous statement, which had said the economy had "stopped worsening." It was the first upgrade since July.

The bank cited a rebound in exports and public spending as underpinning a recovery, while pointing to weak consumer spending and surging unemployment as risks.

Japan eked out its first quarter of growth in the April-June period after a yearlong contraction, but the jobless rate has reached a record high 5.7 percent, and salaries are falling. Prices have also been waning, setting off worries about deflation, which could further sap energy from the economy.

Atsushi Matsumoto, economist at Mizuho Research Institute in Tokyo, warned much of the recovery is coming from government incentives such as tax breaks for ecological cars and refunds for green gadgets.

"The pace of the recovery is still slow," he said. "It's hard to be overly optimistic about the outlook."

The central bank said stable prices were likely to return in the long run, although the outlook remained uncertain amid worries about overseas economies and global financial markets.

Bank Gov. Masaaki Shirakawa said Japan did not face an immediate risk of falling into a deflationary spiral.

Shirakawa reiterated that despite some risks the economy is headed to a recovery by the latter half of fiscal 2009, which ends March 31, 2010.

The Bank of Japan will decide on the fate of extraordinary steps -- such as buying up corporate debt from banks, which were implemented after last year's financial crisis -- by Dec. 31, the date when such measures expire, he said.

The central bank has kept its key rate unchanged at near zero since December, when it cut the rate from 0.3 percent.

Japan's top companies, such as Toyota Motor Corp. and Sony Corp., remain heavily reliant on exports and were hard hit by the plunge in global demand.

They have posted deep losses and are expecting the red ink to continue in the months ahead, but are banking on a resurgence of demand from China and other emerging markets.

The Japanese economy grew at an annual pace of 2.3 percent in the April-June period, joining Germany, France and other nations in marking a gradual recovery.

The Bank of Japan's quarterly "tankan" survey of business sentiment, set to be released next month, is expected to show tough times are far from over for Japanese companies amid fragile domestic demand.

[Associated Press; By YURI KAGEYAMA]

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