Bank of Japan in surprise rate cut

| October 5, 2010 | 0 Comments

The Bank of Japan has today cut interest rates to almost zero, in a bid to boost the economy and continue its battle deflation.

Last week, figures revealed Japanese core consumer prices fell 1.0% in August compared with a year ago – representing the 18th consecutive monthly decline that the world’s no.2 economy has been in deflation.

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.

The Bank of Japan has kept interest rates at 0.1% since December 2008 in a bid to combat deflation and today’s rate cut came as a surprise to many analysts.

One analyst described it as an “utterly surprising and bold move”.

In a statement, the Bank said: “Although Japan’s economy still shows signs of moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment.”

The Japanese recovery has been faltering of late and exports, a crucial driver for economic growth, continue to slow.

In addition, a strong yen could be damaging for the economy. A stronger yen has meant demand for exports has weakened.

The Bank recently took action to weaken the currency - it was the first time in six years that such action had been taken.

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