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Saturday 20th of February 2010
February 18, 2010    

Japan interest rates unchanged

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by Kay Murchie

The Bank of Japan has again elected to keep interest rates on hold at the low level of 0.1%, as widely expected.

It is anticipated that the Bank will leave rates at the low rate until around 2012 as a result of deflationary pressures.

The world’s no.2 economy exited recession in the second quarter of 2009 but there have been fears that the return of deflation could stall growth within the economy.

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 which the economy struggled with falling prices.

Earlier this week, the Bank of Japan’s Governor, Masaaki Shirakawa, said he was “serious” about beating deflation but added it would be a slow process.

The country’s finance minister, Naoto Kan, set a target of price growth of 1% but put pressure on the Bank for more action to support the fragile economy.

Many analysts believe the Bank may inject more money into the banking system as it did late last year - in an attempt to weaken the currency, thereby reducing deflationary pressures.

However, some believe there is little room for injecting funds into the economy since this failed in beating deflation in the past.

Consumer prices in Japan fell by 1.2% in December - the largest fall since the current consumer price index began forty years ago.

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