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Friday 29th of October 2010
October 28, 2010    

Japanese interest rates on hold, growth forecasts cut

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by Kay Murchie

The Bank of Japan (BoJ) has today opted to keep interest rates on hold between zero and 0.1%.

The move comes just weeks after the Bank surprised analysts and cut rates to this level.

The measures come as the economy continues its battle with deflation.

Deflation is also a concern for the Japanese economy. Recent figures revealed Japanese core consumer prices fell 1.0% in August compared with a year ago – representing the 18th 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.

Meanwhile, the BoJ’s next rate-setting meeting has been brought forward by 10 days and will now take place on 4-5 November - taking place shortly after the US Federal Reserve’s next meeting - on 2-3 November.

This will leave the BoJ to respond to any measures the US central bank decides to adopt as the Japanese yen continues to hover around a 15-year high against the US dollar.

A strong yen weakens demand for exports and threatens the economic recovery, and as a result, the Bank has lowered its economic growth forecasts.

The Japanese economy, which is now the world’s third largest, is expected to grow 2.1% in the year to March 2011 and 1.8% the following year.

This compares with previous projections of 2.6% and 1.9% respectively.

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