Bank of Japan to inject 10tn yen into economy

In an attempt to cement a recovery in the world‘s second largest economy, Japan’s central bank is to pump 10 trillion yen (£70 billion, $114 billion) in liquidity into financial markets to boost the economy.

The news came after the Bank of Japan held an emergency meeting today after there have been concerns about the strong yen and the return of deflation.

In a statement, the Bank said the measures would “firmly support Japan’s economic developments toward recovery”.

The Bank added that it would hold interest rates at the low level of 0.1% to fight deflation.

The statement also said that “while Japan’s economy is picking up, there is not yet sufficient momentum to support self-sustaining recovery in business fixed investment and private consumption.

“As for the outlook, the pace of economic improvements is likely to remain moderate until around the middle of fiscal 2010,” added the statement.

Last month, the Cabinet Office acknowledged that deflation had returned for the first time since 2006.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s.

In the meantime, there have been concerns of a strong yen. Last week, Japan’s finance minister, Hirohisa Fujii, said that the Government is monitoring the currency but did not suggest immediate intervention.

While a strong yen is good news for the economy, it makes Japanese exports less competitive – but means imports are more affordable to Japanese consumers. Exports are a key to the economy‘s recovery.

As a result, there have been speculation that Japan’s Government may step in to stem the yen’s appreciation but this is not something it has done since March 2004.

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