The Bank of Japan cut its economic growth forecast and predicted inflation would accelerate in a report that omitted a reference to raising interest rates for the first time in two years.
The world's second-largest economy will grow 1.5 percent in the year ending March 31, less than an October estimate of 2.1 percent, the central bank said in its semi-annual outlook. Governor Masaaki Shirakawa and his six colleagues earlier today left the key lending rate at 0.5 percent.
``The outlook for economic activity and prices is highly uncertain,'' the central bank said. ``It is not appropriate to predetermine the direction of future monetary policy.''
Bonds rose the most in eight months on speculation a deteriorating economy will prompt Shirakawa to shelve his predecessor's policy of gradually raising Japan's borrowing costs, the lowest in the industrialized world. Growth is slowing as the U.S. housing recession weighs on demand for exports and rising raw-materials costs fan inflation and erode profits.
``They made it clear that they now have a neutral bias,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. ``The report makes clear that the downside risks in terms of growth dominate.''
The yen traded at 103.94 per dollar at 4:46 p.m. in Tokyo from 104.02 late yesterday in New York. The yield on Japan's five-year note fell 9.5 basis points, the most since August, to 1.135 percent.
Flexible Policy
``It's not appropriate to predetermine the direction of policy now,'' Shirakawa, who became governor on April 9, told reporters in Tokyo. He said policy needs to be ``flexible'' and the central bank is paying more attention to downside risks to the economy.
Policy makers said consumer prices will rise more than they predicted six months ago. The Bank of Japan, along with central banks in Australia, Europe and elsewhere in Asia, has to juggle the prospect of faster inflation and slowing growth.
Core consumer prices, which exclude fresh food, will rise 1.1 percent, compared with an earlier estimate of 0.4 percent, the bank said. Core prices won't deviate much from the central bank's zero to 2 percent range for price stability, it said.
The economy will grow 1.7 percent in the year ending March 2010 and core prices will increase 1 percent, the policy makers forecast. ``Close attention needs to be paid to future developments in economic activity and prices,'' the bank said.
Potential Growth
Growth in the current year and the next 12 months is still within the 1.5 percent to 2 percent range the bank considers to be Japan's potential growth rate, or the pace of expansion achievable when most of the country's labor and capacity is used.
The outlook report described Japan's lending conditions as ``generally accommodative'' compared with ``extremely accommodative'' in October.
The yen's gains are affecting exports while cushioning the impact of the rising cost of imported raw materials, Shirakawa said. The currency's strength should be measured against the euro and other major currencies as well as the dollar and board members reflected that view in today's report, he added.
The bank said it has kept the benchmark rate unchanged since raising it in February 2007 because risks including higher energy costs and a domestic housing slump created ``uncertainty'' in the economy.
``The Bank of Japan has time to wait and see for now,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. ``The bank will resume the process of normalizing interest rates once it becomes confident that the economy will return to a sustainable growth path.''
Wait and See
Investors see a 56 percent chance for a rate increase by December, according to JPMorgan Chase & Co. calculations.
The bank removed language it had used since April 2006 that said it will ``adjust the level of interest rates gradually in accordance with improvements in the economic and price situation.''
Factory output fell at the fastest pace in five years in March, a report showed today. The unemployment rate fell to 3.8 percent, the ratio of jobs to applicants slid to the lowest in almost three years, and household spending declined 1.6 percent.
Housing starts tumbled 15.6 percent in March, the Land Ministry said today, halting five months of improvements.
``With consumption, production and employment all getting worse, the Japanese economy is weakening,'' said Yuji Kameoka, a senior economist at Daiwa Institute of Research in Tokyo, a unit of Japan's second-largest brokerage. ``The BOJ cannot move rates this year amid a slowing economy and accelerating inflation.''
No comments:
Post a Comment