MercoPress. South Atlantic News Agency

Japan ready for interest rate soft take off

Following a two days meeting the Bank of Japan announced Thursday new guidelines for monetary policy, which have been interpreted as possible changes to its near zero interest rate policy.

The bank's Monetary Policy Meeting reported that "on the future path of monetary policy, there will be a period in which the overnight call rate is at effectively zero percent, followed by a gradual adjustment in the light of developments in economic activity and prices. In this process, if the risk mentioned above remains muted, in other words, if it is judged that inflationary pressures are restrained as the economy follows a balanced and sustainable growth path, an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time".

However, "given that the effects of the quantitative easing policy on economic activity and prices now mainly result from short-term interest rates being zero, there will be no abrupt change as a result of today's policy decision".

In the meantime, "it should be noted that, over the medium to long-term, there is a risk of swings in economic activity, as the stimulus from monetary policy is amplified against the backdrop of improving corporate profitability and a positive turn in price developments".

The move reflects the steady improvement in Japanese output, which is expected to lead to price growth and stronger inflation.

In its statement the bank specifies that Japan's economy continues to recover steadily and looking ahead expects a sustained recovery.

"Exports have continued to increase reflecting the expansion of overseas economies. With respect to domestic private demand, business fixed investment has also continued to increase against the backdrop of high corporate profits. Robust corporate activity is positively influencing households, and private consumption has become solid".

An approximate range between zero and 2% for medium and long term price stability was established by board members.

Japan has seen a prolonged period of deflation since the 1990s, as its economy has endured years of stagnation and intermittent recession and in 2001 established the monetary strategy currently under review.

"Since March 2001, in view of preventing sustained decline in prices and preparing the basis for sustainable growth, the Bank of Japan has supplied extremely ample liquidity with current account balance at the Bank as the main operating target".

The Bank also made a clear commitment "to maintain the policy until the consumer price index (excluding fresh food, on a nationwide basis) registers stably zero percent or an increase year on year".