Bank of Japan holds rates steady

August 19, 2008
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, TOKYO, August 19  – Japan\’s central bank downgraded its assessment of Asia\’s largest economy Tuesday, warning growth will remain "sluggish" as it left its super-low interest rates unchanged amid growing fears of a recession.

The unanimous decision to leave the benchmark rate unchanged at 0.5 percent had been widely expected after the economy contracted in the second quarter of 2008, leaving Japan teetering on the brink of recession.

At the same time inflation hit the fastest pace in a decade in June, creating a dilemma for the central bank, which would like to rein in soaring prices but fears that higher borrowing costs would squeeze the economy.

"Economic growth has been sluggish against the backdrop of high energy and materials prices and weaker growth in exports," the Bank of Japan (BoJ) said in a statement. Last month it had said growth was "slowing further."

"Global financial markets remain unstable and there are downside risks to the world economy, particularly the US economy," it warned Tuesday.

But the BoJ said it expected Japan, the world\’s second largest economy, to resume its recovery from recession in the 1990s as oil prices ease and the world economy stabilises.

"While growth will likely remain sluggish for the time being, it is expected to return gradually onto a moderate growth path as commodity prices level out and overseas economies move out of their deceleration phase," it said.

Japan\’s government earlier this month effectively declared an end to the country\’s longest period of economic expansion in postwar times.

The BoJ last raised interest rates in February 2007 in an effort to wean the economy off its deflation-busting policy of virtually free credit and return borrowing costs to more normal levels.

The bank is now more concerned about inflation than deflation as soaring energy, food and material costs eat into corporate profits and weigh on consumer spending.

Japan\’s core inflation rate hit a decade-high of 1.9 percent in June. Wholesale inflation jumped to a 27-year high of 7.1 percent in July.

But the BoJ is reluctant to raise interest rates to contain inflation after Japan\’s economy contracted by 0.6 percent in the second quarter, raising fears of its first recession in six years.

Consumer price inflation "is expected to be somewhat higher over the coming months but to moderate gradually thereafter. Thus it is likely that the economy will return onto a sustainable growth path with price stability," the BoJ s

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