MW: Bank of Japan holds rates unchanged, signals outlook worry
By Chris Oliver, MarketWatch
HONG KONG (MarketWatch) -- The Bank of Japan held interest rates unchanged on Tuesday, saying the economy appeared to be recovering at a slow pace while leaving open the possibility of additional emergency action to support the economy.
It kept its assessment for a moderate recovery unchanged, noting that potential downside risks had increased. The backdrop for the move: heightened uncertainty, especially about the U.S. economy and volatility in stock and foreign-exchange markets.
"The bank recognizes that Japan's economy faces the critical challenge of overcoming deflation and returning to a stable growth path with price stability," the policy board said in its statement. "The bank will carefully examine the outlook for economic activity and price."
As expected, the policy board held the overnight call rate at 0.1% in a unanimous vote. It said conditions in the labor market were "severe" but added that it had improved somewhat.
The bank signaled that it was uncertain of the broader price trends. Higher commodity prices suggested that "inflation will rise more than expected," though medium- and long-term inflation expectations were more downward. Prices throughout the economy, it said, were still falling year over year, though the rate of decline had eased.
It said it would maintain the "extremely accommodative" financial environment and take additional policy action in a timely manner, if necessary.
Japan's Nikkei Stock Average traded 0.8% lower in mid-afternoon trade, extending the weakness from the morning session.
Japanese news reports last week said the BoJ is gearing up for further easing in monetary policy through measures that could include buying government bonds, reducing interest rates, or rolling out additional lending plans.
At an unscheduled meeting Aug. 30, the bank said it would expand its special lending facility to six months from three, amid mounting political pressure as the yen strengthened to a 15-year high against the U.S. dollar.
Governor Masaaki Shirakawa will hold a news conference late afternoon Tuesday in Tokyo
The BOJ also said in its statement Tuesday that personal consumption had ticked upward, amid an unusually hot summer and as consumers rushed to buy appliances and other goods before a government incentive expired.
