Reflecting continued concern about the fragility of the country’s economic recovery, the Bank of Japan announced Friday it was maintaining its low interest rate monetary policy.
“The Bank of Japan will encourage the unsecured overnight call rate to remain at effectively zero percent,” the central bank said in a statement, referring to its operations in the call market, where financial institutions borrow and lend to each other.
The decision taken at its most recent policy meeting comes amid rising market expectations that the BOJ may begin raising rates by summer, when it is expected to reduce the outstanding balance of current account deposits held by at the central bank to the legally required level of about 6 trillion yen.
The current account balance was expected to hit 19.3 trillion yen Friday and fall to about 10 trillion yen by the end of May, following the end of the central bank’s “quantitative easing” policy on March 9. The BOJ ended the unconventional stance after the core consumer price index showed several months of gains.
Under quantitative easing, the BOJ, rather than adjusting interest rates, flooded the banking system with liquidity for five years to combat deflation.
The BOJ policy meeting also endorsed its biannual outlook for economic activity and prices from fiscal 2006 through 2007, noting the year-on-year rate of increase in the consumer price index may hit “the middle of the 0 to 1 percent” range in fiscal 2006 and stay “slightly below 1 percent” in fiscal 2007.
The report also forecasts real economic growth of about 2.5 percent in fiscal 2006 and 2 percent in fiscal 2007, saying conditions of persistent oversupply have dissipated, and the output gap — the difference between actual and potential growth — seems to have closed.
“Japan’s economy is likely to experience a sustained period of expansion, with domestic and external demand, and also the corporate and household sectors, well in balance,” the bank said.