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April 30, 2010    

BoJ elects to hold interest rates at 0.1%

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by Kay Murchie
BoJ elects to hold interest rates at 0.1%

After a two-day policy board meeting, the Bank of Japan (BoJ) has elected to keep interest rates at 0.1%, as widely expected.

Interest rates in the world’s second largest economy have been at the low level since December 2008 in a bid to fight off deflation.

Deflation remains a problem for the economy. Japanese core consumer prices fell 1.2% in March from a year earlier – representing the 13th consecutive monthly decline that the economy has been in deflation.

Deflation (where prices fall rather than increase) can be a serious threat to an economy because it deters consumers and businesses from spending in expectation of falling prices.

Japan has battled with deflation in the past and was a problem for the economy during its so-called “Lost Decade” in the 1990s in which the economy struggled with falling prices.

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

Meanwhile, the central bank today said: “Japan’s economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability.

“It was confirmed at the meeting that, in the conduct of monetary policy, the bank would aim to maintain the extremely accommodative financial environment,” it added.

Separate figures this week revealed Japan’s factory output rose in March, albeit at a slower than expected pace.

Factory output rose 0.3% on-month in March, which was less than expectations of a 0.9% gain. However, it was the first rise in two months and followed the disappointing 0.6% fall in February.

In the meantime, Japan’s unemployment rate crept up to 5% last month - slightly higher than the 4.9% expected by the market.

According to the Ministry of Internal Affairs and Communications, the number of unemployed grew by 150,000 from a year earlier to 3.5 million.

Separate data published today revealed household spending soared 4.4% on-year and according to Shinko Research Institute’s Norio Miyagawa, this was “probably due to rush demand for flat-screen TVs in March ahead of an introduction of new and less generous Government incentive programs to buy home appliances.”

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