BOJ Keeps Rate at 0.5%

The Bank of Japan said it became more pessimistic about the outlook for the economy and kept interest rates at the lowest level among industrial nations.

The world's second-largest economy shrank at an annual 2.4 percent pace in the second quarter, as decade-high inflation deterred spending and a global slowdown dented exports. In April, the central bank shelved a policy of raising rates, and with Japan on the verge of a recession, economists say borrowing costs are unlikely to increase until next year at the earliest.

The yen traded at 110.04 per dollar at 5:12 p.m. in Tokyo from 109.80 before the announcement. The yield on Japan's 10-year bond fell half a basis point to 1.435 percent. The rate decision was unanimous, and expected by all 32 economists surveyed.

World financial-market instability, the U.S. and global slowdown, and rising commodity prices all pose risks for Japan, the central bank said in the statement. The bank's downgrade of the economic assessment was the second in a row, after it said in July that the expansion was ``slowing further.''

Costlier materials and slumping overseas sales are crimping profits at companies from Toyota Motor Corp. to Canon Inc. Exports dropped the most since the 2001-2002 recession, last week's gross domestic product report showed, robbing Japan of the engine that drove its longest postwar expansion.

``While growth will likely remain sluggish for the time being, it is expected to return gradually onto a moderate growth path'' as commodity prices ease and the global economy recovers, the bank said.

``If the downside risks to the economy turn out to decrease, there will be an increased risk that prolonging the period of accommodative financial conditions will lead to swings in economic activity and prices,'' the bank said.

The Bank of Japan hadn't used the term ``sluggish'' to describe the economy since 1998, when Asia was in the throes of a currency crisis and the government had to buy failed lenders including Long-Term Credit Bank of Japan Ltd.

The government earlier this month said the economy is ``weakening,'' language it hadn't used since the most recent recession in 2001. Exports, factory production and household spending all fell in June and the unemployment rate increased.

Profit at Toyota, Japan's biggest company, fell the most in five years last quarter as U.S. sales of sport-utility vehicles plunged. Canon will cut operating costs and spend less than originally planned on research and development to meet this year's profit forecast, the Nikkei newspaper reported today.

The bank said consumer prices are ``expected to be somewhat higher over the coming months but to moderate gradually thereafter.''

Consumer prices excluding fresh food climbed 1.9 percent in June from a year earlier, the fastest pace in a decade. Prices businesses pay for fuel and materials surged 7.1 percent in July, the most since the wake of the second oil crisis 27 years ago.

Still, there's little evidence that Japan's inflation is spreading from imported fuel and foods. Excluding food and energy, consumer prices rose 0.1 percent in June. The equivalent gauge in the U.S. climbed 2.5 percent last month.


BOJ Keeps Rate at 0.5%, Bloomberg
8/19/2008 6:11:38 AM