Japan maintains low rates

TOKYO // The Japanese central bank has maintained its extremely low interest rates and resisted growing government pressure to take more action to fight deflation. The Bank of Japan (BoJ) board yesterday voted unanimously to keep its benchmark rate steady at 0.1 per cent, saying that reversing a slump in consumer prices was a critical challenge. The bank has held to the rate since December 2008.

"Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand," it said. "The bank recognises that it is a critical challenge for Japan's economy to overcome deflation and return to a sustainable growth path with price stability." The BoJ said it would "maintain the extremely accommodative financial environment", but did not announce new measures, such as increased bond purchases.

"The BoJ is sending the message that the country can get out from deflation without taking further steps to ease monetary policy," said Susumu Kato, an economist with Credit Agricole. The bank has already slashed interest rates to just 0.1 per cent and pumped trillions of yen into the financial system to boost the economy after the worst downturn in decades. But it has been criticised by the Japanese government for not doing enough to ward off the threat of deflation similar to that seen after the country's economic bubble burst in the early 1990s.

Naoto Kan, the Japanese finance minister, said on Tuesday that the government and central bank were aiming for a positive annual inflation rate of about 1 per cent, referring to a specific inflation target for the first time. Under pressure from the government, the BoJ had said in December that most of its policy board members favoured an inflation rate of about 1 per cent. But Masaaki Shirakawa, the governor of the BoJ, indicated yesterday that the central bank did not have a firm inflation target.

"If we focus on price movements too much we could overlook imbalances in the overall economy," Mr Shirakawa said. Japan entered a year-long recession in 2008 as its exports collapsed due to a severe global downturn. It returned to growth in the second quarter of last year, but the recovery remains fragile with falling consumer prices, high public debt and weak domestic demand. * with Agence France-Presse

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