Bank of Japan keeps interest rates at record low

| December 21, 2010 | 0 Comments

The Bank of Japan (BoJ) has today left interest rates at almost zero, in a bid to boost the economy and continue its battle against deflation.

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 central bank today warned that the recovery “seems to be pausing”.

Last month, the Japanese Government approved a £39 billion stimulus package – designed to boost the fragile economic recovery by creating jobs.

However, official figures recently revealed the Japanese economy grew faster than estimated in the third quarter due to stronger corporate spending.

The world’s third largest economy grew by 1.1% in the July to September period, up from the first estimate of 0.9%.

On an annual basis, the economy expanded by 4.5% from an earlier estimate of 3.9% and exceeded expectations of a revision to 4.1%.

However, deflation continues to be a problem for the economy. The latest figures show Japanese core consumer prices fell 0.6% in October compared with a year ago – representing the 20th consecutive monthly decline that the 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.

In related news, the BoJ‘s closely watched quarterly Tankan survey revealed last week business confidence has dipped – hit by a strong yen and slowing exports.

The influential Tankan index revealed business confidence among major manufacturers fell for the first time in almost two years.

The Tankan figures are closely monitored by the BoJ when deciding monetary policy.

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