Bank of Japan sees two year recession

January 22, 2009

, TOKYO, January 22 – Japan\’s economy faces a two-year recession, the central bank warned on Thursday as it unveiled new measures to repair battered credit markets by mopping up risky assets.

The world\’s second biggest economy is expected to contract by 1.8 percent in the current financial year to March and by 2.0 percent the following year, the Bank of Japan said, downgrading its earlier outlook.

The Bank left its key interest rate unchanged at 0.1 percent, as expected, while announcing fresh steps aimed at unblocking credit flows.

The BoJ said it would spend up to three trillion yen (33.7 billion dollars) to buy commercial paper, a type of short-term corporate debt, to make it easier for companies to secure vital credit during the recession.

"Exports have been decreasing substantially, reflecting a slowdown in overseas economies, and domestic demand has become weaker against the background of declining corporate profits and the worsening employment and income situation in the household sector," the central bank said.

"Financial conditions have become tighter."

The BoJ has little room to reduce its rock-bottom interest rates further so it is seeking alternative tools to repair credit markets and rescue the economy from a deepening recession.

The BoJ said it would start buying commercial paper this month, acknowledging there was a risk it might lose taxpayers\’ money. It also said it was considering buying corporate bonds.

The Bank painted a gloomy outlook for the Japanese economy, saying conditions were "deteriorating significantly and are likely to continue deteriorating for the time being."

Previously it had projected positive growth of 0.1 percent this financial year to March and 0.6 percent next year.

But there was some light at the end of the tunnel as the BoJ predicted growth of 1.5 percent in the year to March 2011.

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