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Japan: rates unchanged at 0.5% as economy looses steam

Thursday, May 17th 2007 - 21:00 UTC
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The Bank of Japan on Thursday kept its key interest rate on hold at 0.5% after a recent slip in consumer prices but the country's chief banker cautioned about leaving rates “too low, too long”.

The decision to keep leave rates unchanged at 0.5% came hours before government figures showed the economy had expanded at a slightly slower pace in the first three months of the year than analysts expected. "Low interest rates, if left too long at levels that do not reflect economic fundamentals, could distort the distribution of resources and hinder the economic recovery" Bank of Japan governor Toshihiko Fukui told a press conference after a two-day meeting of the central bank's policy board. "So, when there is a strong possibility of the economy sustaining growth amid stable price trends, there is a need to adjust interest rates in tandem with the pace of improvement in the economy, while monitoring various risks," he added. Fukui said the central bank could increase interest rates even when the core consumer price index was decreasing year-on-year. "I am not saying that we can definitely hike interest rates anytime while the core CPI is posting a year-on-year fall," the governor said. "But we can still hike interest rates if the core CPI happens to be in negative territory, after thorough monitoring and analysis of the economy and prices". Japan's last rate increase to 0.5% was in February. The core consumer price index dipped 0.3% in March from a year earlier, declining for the second straight month. Fukui said recent economic data, including the first-quarter GDP data, supported his view that the economy is expanding moderately. Official data showed Japan's GDP expanded 0.6% in the first quarter over the previous quarter at an annualized 2.4%. Similarly last year's last quarter expanded 1.2% over the third quarter at a 5% annual rate. In Thursday trading the Japanese currency plummeted to 120.97 against the US dollar as analysts speculated that rates would only rise again in the fourth quarter.

Categories: Economy, International.

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