BOJ warns recovery has ‘paused,’ keeps rate policy

by Jun Hongo

Staff Writer

The Bank of Japan said Wednesday it will maintain its zero interest rate policy but gave a somber assessment that a pickup in economic activity has “paused.”

The economy is being influenced by “the effects of a slowdown in overseas economies and of the appreciation of the yen,” the central bank said in a statement after a two-day meeting of its Policy Board.

While noting that business fixed investment and private consumption has remained firm, it also predicted economic activity will “remain more or less flat for the time being.”

The ultra-low interest rate, maintained by a unanimous vote, will leave the key short-term interest rate at zero to 0.1 percent. The board members also agreed to leave unchanged the central bank’s credit and asset-purchasing program at ¥55 trillion.

The BOJ’s latest quarterly “tankan” index, released earlier this month, indicated that business sentiment among large manufacturers is on the decline, underscoring the growing concern over Europe’s sovereign credit risk and the persistent strength of the yen.

The business index for major manufacturers — companies capitalized at ¥1 billion or more — fell to minus 4, down six points from September, when it was plus 2.

The BOJ said Wednesday that the sovereign debt problems in Europe will continue to pose a risk to the global economy, while adding the U.S. economy may face a prolonged slowdown due to the effects of balance-sheet repair.

On Europe’s sovereign debt crisis, BOJ Gov. Masaaki Shirakawa said progress is being made, but the situation remains tense.

“This is an issue that affects Japan both directly and indirectly,” he said during a news conference after the Policy Board meeting. The relevant players should work “with a strong will and quickly, and without fail,” he said.

The BOJ also touched on the flooding in Thailand as a reason for exports and production having remained “more or less flat.”

“Careful attention should continue to be paid on how Japan’s economy will be affected by the uncertainty regarding financial and economic developments overseas,” the BOJ said.

But the bank also predicted that the economy will return to a moderate recovery path “as the pace of recovery in overseas economies picks up.”

The BOJ said it will steadily implement the purchase of financial assets through its ¥55 trillion fund to increase market liquidity.