The Bank of Japan said Tuesday it will keep its key interest rate at 0.1 percent and maintained the economy still shows signs of recovery, but also warned of downside risks amid growing concerns over the U.S. economic outlook and the stronger yen.
In a statement issued after a two-day policy meeting, the BOJ referred to “downside risks such as those related to international financial developments,” apparently keeping in mind the yen’s recent appreciation and the financial woes in Europe.
While voting unanimously to keep the target rate for unsecured overnight call money, a level unchanged since December 2008, the BOJ Policy Board maintained that “Japan’s economy shows further signs of a moderate recovery.”
It also noted that exports and production have been increasing on the back of high growth in emerging economies and increased global demand for information-technology related goods, and that private consumption has been generally picking up.
The central bank also did not change its view that the economy “is likely to be on a recovery trend.”
Later the same day, BOJ Gov. Masaaki Shirakawa said the bank will “carefully” check the impact of the yen’s move, as it could be a factor that may “largely affect” the economy.
But he also noted at a press conference held after the two-day meeting that the BOJ has to make a “balanced” assessment by taking into consideration the global financial situation.
When the yen rose sharply against the dollar in December because of debt concerns in Dubai, the central bank was quick to introduce a new funding operation.
But the BOJ apparently will refrain from taking additional easing measures this time, as businesses appear to be making solid profits and consumer sentiment seems to be picking up.
The uncertain outlook for the U.S. economy could spur further yen-buying, with some market players speculating the dollar may be heading toward a 15-year low below ¥85 in the wake of recent dismal U.S. economic data.
A strong yen is generally unfavorable for Japanese exporters, a key driving force of the economy, as it erodes the value of their earnings when repatriated.
It could also lead to lower import prices and prolonged deflation.
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