By Palash R. Ghosh: Subscribe to Palash's RSS feed
September 7, 2010 2:54 PM EDT
The Bank of Japan (BoJ) kept its key interest rate unchanged at 0.1 percent, explaining that the country's economy appears to be recovering at a modest pace, although potential downside risks have risen.
"The bank recognizes that Japan's economy faces the critical challenge of overcoming deflation and returning to a stable growth path with price stability," the BOJ stated. "The bank will carefully examine the outlook for economic activity and prices, and, if judged necessary, take policy actions in a timely and appropriate manner."
In a press conference after the announcement, Governor Masaaki Shirakawa stated the central bank is closely monitoring the continuous rise of the yen currency and that it will take appropriate policy action.
"We are aware that Japanese exporters have been significantly affected by the yen's strength," he said. "We are very carefully watching the impact of the stronger yen on the Japanese economy.”
In recent weeks, under pressure from the government to stave off deflation and put a brake on the climbing yen, the BoJ has announced a number of monetary easing measures, including an expanded special lending facility and a higher funding ceiling on a fixed-rate loan program. The BoJ said it may also purchase government bonds.
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However, investors have not responded with any enthusiasm as the Japanese equities continue to slip and the yen remains strong.
The Nikkei stock index declined 0.81 percent in Tuesday trading, while the yen is rising against the U.S. dollar.
Vishnu Varathan, Asia economist at Capital Economics, said that although the BoJ adopted a more cautious outlook, the central bank “will probably stay reluctant to implement the further quantitative easing measures which are needed to defeat deflation.”
Despite deflation and concerns about yen gains endangering the economic recovery, Varathan noted, the BoJ still seems hesitant to commit to unleashing a fresh round of “quantitative easing” measures.
“We believe that the BoJ is not quite ready to intervene directly in the currency market,” he said. “Any such moves would be contentious at a time when countries such as China are being urged to stop intervening in currency markets. This rules out coordinated intervention, which would likely have the most impact.”
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