BOJ to maintain ‘zero’ rate, sees second-half recovery

Board warns problems in U.S., Europe remain economic risks

by Jun Hongo

Staff Writer

The Bank of Japan’s Policy Board unanimously agreed Wednesday to maintain the current virtually zero-interest rate policy while shunning additional monetary easing to cope with impacts from the recent sharp rise in the yen.

As a result, the BOJ will leave unchanged its credit and asset-purchasing programs totaling ¥50 trillion, additional monetary easing measures that it announced last month.

The agreement, reached in a unanimous vote by the nine board members, said the dwindling U.S. economy, still suffering from balance-sheet adjustments in the wake of the 2008 financial crisis, and the possible consequences of sovereign debt problems in Europe, remain economic risks for Japan that “warrant attention.”

The board’s statement also said that the “supply-side constraints” caused by the March 11 disaster have eased almost to prequake levels, with production and exports increasing. The quake disrupted supply chains in the manufacturing sector and pushed down exports.

The economy “is expected to return to a moderate recovery path from the second half of fiscal 2011,” the BOJ said in a statement.

The BOJ “is in the process of pushing forward a strong monetary easing” and Wednesday’s decision should not be taken as the central bank shunning away from taking further steps, Gov. Masaaki Shirakawa said after the policy meeting.

Although it was widely believed that the BOJ would leave its key short-term interest rate at zero to 0.1 percent, the announcement by Switzerland’s central bank that it will cap the franc against the euro raised speculation that the BOJ will be pressured to take additional steps to cope with impacts from the yen’s rise.

But the board members were unswayed.

Shirakawa said he is not in a position to comment on the move by the Swiss central bank but said the BOJ will continue working “persistently” to bring an end to Japan’s deflation and to induce economic growth.

The BOJ said it will continue purchasing financial assets, noting that it increased its credit and debt-purchase program to ¥50 trillion from ¥40 trillion last month to stimulate growth.

Regarding the foreign exchange market, the board said it is “necessary to carefully monitor” the uncertainty regarding overseas markets and the ensuing fluctuations in currency rates.

The BOJ “commits itself to continuing the virtually zero-interest rate policy until it judges that price stability is in sight,” the board also said.

Shirakawa is scheduled to visit France to attend a Group of Seven gathering Friday and Saturday of his counterparts, along with Finance Minister Jun Azumi.

“I believe that Europe’s economic issues will have huge weight” at the G-7 meeting, Shirakawa said, adding he looks forward to frank exchanges on both global and Japanese economic topics.

Forex reserves up 5.9%

KYODO

Japan’s foreign exchange reserves expanded 5.9 percent in August from July to a record $1.2185 trillion on the market intervention by the government to weaken the yen by selling it, most likely against the dollar and other major currencies, the government said Wednesday.

The official reserve assets, the second-biggest in the world after China’s, grew for the second consecutive month, also affected by the recent falls in long-term interest rates in the U.S. and Europe, which have raised the value of Japanese holdings of dollar- and euro-denominated bonds, the Finance Ministry said.

The reserve assets mainly consist of securities and deposits denominated in foreign currencies and gold, as well as reserve positions and special drawing rights at the International Monetary Fund.

The ministry earlier said it and the Bank of Japan sold ¥4.5129 trillion for foreign currencies between July 28 and Aug. 29. More detailed information, such as how many times they intervened and which currency they bought, will be announced in November.