Japan central bank leaves interest rate unchanged

[December 21, 2010]  TOKYO (AP) -- Japan's central bank kept its key interest rate unchanged at effectively zero Tuesday as the country struggles to keep its economic recovery alive.

In a widely expected decision, the Bank of Japan's nine-member policy board voted unanimously at a two-day meeting to keep the overnight call rate target at zero to 0.1 percent.

The central bank maintained its assessment of the world's No. 3 economy.

"Japan's economy still shows signs of a moderate recovery, but the recovery seems to be pausing," the central bank said in its statement.

Japan has been battered by slowing overseas demand, a strong yen and persistent deflation. Exports are losing momentum, and the employment rate remains high by Japanese standards.

A key central bank survey last week showed that business sentiment fell for the first time in seven quarters.

In a recent survey of 42 economists, the government-affiliated Economic Planning Association forecast Wednesday that gross domestic product would shrink 1.9 percent in the fourth quarter.

Many economists expect the slowdown to force the central bank to once again ease monetary policy.

Goldman Sachs, however, says that Japan is on track to grow next year. On Tuesday, it raised its forecast for the country's gross domestic product growth in 2011, saying it now expects a 1.6 percent expansion from 1.4 percent in its previous estimate. The change was prompted by a brighter outlook for the U.S. after lawmakers extended tax cuts.

"A strong U.S. economy would translate into growth in exports to the U.S. and a pause in the yen's rise," said Chiwoong Lee, Japan senior economist, in note to clients.

For now, the central bank refrained for making any moves while it evaluates the effectiveness of monetary easing schemes announced in October.

It established a 5 trillion yen ($61 billion) fund to purchase financial assets such as government securities and commercial paper in an attempt to lower longer-term interest rates and risk premiums. The central bank is offering another 30 trillion yen through a loan program.

The central bank said it would "steadily" buy assets and provide longer-term funds "so that the effects of comprehensive monetary easing spread."

It pledged to continue supporting the economy through a three-pronged approach of "powerful" monetary easing, financial market stability and "providing support to strengthen the foundations of economic growth."

[Associated Press; By TOMOKO A. HOSAKA]

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