Central bank keeps key rate between zero and 0.1%


The Bank of Japan raised its growth forecasts for the year through March as strong overseas demand supports the economy.

Policy makers predicted an expansion of 3.3 percent for the 2010 fiscal year, compared with the 2.1 percent estimated in October, the central bank said in a statement Tuesday in Tokyo. The BOJ also held the key interest rate between zero and 0.1 percent and the size of a program to buy securities at 5 trillion yen ($60 billion), by a unanimous vote.

The BOJ’s more optimistic view was in line with the government’s 3.1 percent expansion forecast, as accelerating growth in Japan’s largest overseas markets helped boost output. Still, the risk of a further yen appreciation hurting exports and worsening deflation leaves open the possibility of the BOJ expanding its stimulus steps, HSBC Securities said.

“The recovery trend of the Japanese economy is becoming increasingly evident,” Seiji Shiraishi, chief economist at HSBC Securities in Tokyo, said before the decision. Even so, “I think there is still about a 30 percent chance for another policy easing around March if the yen strengthens and political pressure remains.” 

The yield on the benchmark 10-year bond rose to 1.240 percent as of 12:39 p.m. in Tokyo. It touched 1.26 percent in Jan. 19, the highest since Dec. 16. Japan’s currency traded at 82.45 per dollar. The yen has fallen 3 percent since touching 80.22 per dollar on Nov. 1, the highest since April 1995.

World food prices climbed 25 percent last year to a record in December on higher sugar, grain and oilseed costs, according to the United Nations. The level surpassed that reached in 2008, when costlier wheat prompted Japan’s largest flour miller Nisshin Seifun Group Inc. and Yamazaki Baking Co. to raise bread and noodle prices.

China’s growth accelerated to 9.8 percent in the fourth quarter, while data due Jan. 28 are expected to show the U.S. economy expanded at a 3.5 percent annual rate in the fourth quarter from 2.6 percent. The U.S. and China together account for more than a third of Japan’s overseas sales.

In Japan, the expansion will probably speed up in each quarter of 2011 after contracting at an estimated 0.75 percent annual pace in the final three months of 2010, according to a Bloomberg News survey. Industrial output increased for the first time in six months in November.

“Japan is set on a path of moderate acceleration following the contraction,” said Akio Makabe, a professor of economics of Shinshu University in Matsumoto city in central Japan. “Still, some uncertainties remain over the outlook and deflationary pressure persists in the economy.”

Core consumer prices, which exclude fresh food, dropped for a 21st straight month in November. The government will reset the index this year, and that’s expected to result in a further decline, reflecting falling prices of electronic products such as flat-screen televisions.

Governor Masaaki Shirakawa and his policy board also forecast that consumer prices will decrease 0.3 percent this fiscal year compared with their projection of a 0.4 percent decline three months earlier. It sees inflation picking up to 0.3 percent the following year, higher than its October prediction of 0.1 percent.

Core prices may decline by 0.6 percent in fiscal 2011, pulled down by the effects of the index revision, according to the median projection of 15 economists surveyed by Bloomberg News. The CPI is reset every five years. The BOJ has pledged to keep the current policy until it can see signs of stable price moves, which officials define as increases of around 1 percent.

Japan’s central bank will raise interest rates in 2013 at the earliest, ten of 15 economists surveyed by Bloomberg News last week predicted, while three said a rate increase will occur in 2012. One forecast the BOJ will wait until 2014 and one declined to make a forecast.

Julian Jessop, chief international economist at Capital Economics Ltd. in London, said in a report he expects “a further substantial loosening in monetary policy by the end of the year, especially as the room for fiscal stimulus is now largely exhausted.”

Japan’s parliament started a regular session Monday to discuss Prime Minister Naoto Kan’s record 92.4 trillion yen annual budget to shore up the economy, which is saddled with debt the Organization for Economic Cooperation and Development estimates will exceed twice the size of the economy this year.

The BOJ’s 5 trillion yen fund, unveiled in October, has purchased assets worth 1.5 trillion yen as of Jan. 20, including government debt, exchange-traded-funds and real estate investment trusts, a central bank report showed Monday. BOJ policy makers have said the bank will expand the fund if more stimulus becomes necessary. 

(Bloomberg)