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Bank of Japan says economy on recovery path

TOKYO, Sept 17 – Japan\’s central bank said Thursday the world\’s number two economy was showing signs of a recovery, as it maintained its stimulative measures aimed at battling the worst slump in decades.

The Bank of Japan left its key interest rate unchanged at 0.1 percent in a unanimous decision by the eight-member policy board.

"Japan\’s economic conditions are showing signs of recovery," BoJ governor Masaaki Shirakawa said. "Public investment is increasing, and exports and production are also rising."

"On the other hand, business fixed investment is declining mainly reflecting weak corporate profits," he said.

Private consumption "remains generally weak amid the worsening employment and income situation."

The comments were slightly more upbeat than the BoJ\’s view last month that economic conditions had "stopped worsening."

Japan\’s economy returned to positive growth in April-June, limping out of a year-long recession, but exports and factory output remain much lower than before the economic crisis and unemployment is at a post-war high.

Deflation has also deepened with core consumer prices dropping 2.2 percent in July from a year earlier — the fastest pace on record.

And with the jobless rate at its highest level since World War II, prices are expected to continue to slide, albeit at a slower pace, Shirakawa said.

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Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, prompting consumers to put off purchases in the hope of further price drops and reducing corporate earnings.

"But the risk of the economy falling into (another) deflationary spiral is low," Shirakawa said.

Regarding the yen\’s recent strength, he echoed comments by Japan\’s new finance minister who said the previous day that the government was unlikely to intervene in currency markets to put a ceiling on the yen\’s appreciation.

"While a strong yen may pressure the economy in the short term by depressing prices, it bolsters it in the mid- to long-term," Shirakawa said, adding that a stable exchange "is desirable."

The Bank has been fighting a severe recession with super-low interest rates and a policy of buying up corporate debt to keep credit flowing to firms during the financial crisis.

One BoJ board member, Miyako Suda, said earlier this month that the need for the emergency measures to support cash-strapped companies were decreasing as the global financial crisis abates.

But it is unclear whether the rest of the board shares her views. Suda is considered one of the more hawkish members and was a lone dissenter in January against the programme to buy corporate bonds.

Shirakawa said that the decision on whether to renew the emergency measures — due to expire at the end of December – would depend on market conditions.

Speaking a year after the collapse of US investment bank Lehman Brothers, the governor warned that while threats to the Japanese economy were easing, any recovery might be tepid.

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But he said that the central bank would "continue to exert its utmost efforts" to return Japan to sustainable growth and price stability.

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