TOKYO, Apr 7 – Japan\’s central bank kept its key lending rate unchanged at 0.1 percent Wednesday and signalled that a recovery in the world\’s number two economy is on track despite the "critical challenge" of deflation.
But while strengthening overseas markets and stimulus measures have buoyed the economy, weak domestic demand poses a key hurdle, the bank said.
There is "not yet sufficient momentum to support a self-sustaining recovery in domestic private demand," it said in a statement at the end of a two-day meeting.
The Bank of Japan (BoJ) has kept rates unchanged since December 2008 at the height of the global financial crisis and is likely to retain easy credit measures for the foreseeable future due to stubborn deflation.
The bank said the pace of recovery "is likely to be moderate for the time being", and maintained an earlier view on the need to tackle deflation, which is a drag on growth.
"It is a critical challenge for Japan\’s economy to overcome deflation and return to a sustainable growth path with price stability."
Bank governor Masaaki Shirawaka is expected to hold a press conference later in the day.
Markets had been expecting the bank to upgrade its assessment of the economy following its Tankan survey last week that showed improved business sentiment among major Japanese manufacturers due to a rebound in exports.
The survey showed companies expect a bounce in profits and plan to ease spending cuts on factories and equipment compared to the previous year, boosting Japan\’s prospects of sustainable growth.
Despite the recent positive economic signs, "the BoJ is keeping its assessment largely unchanged because it wants to remain prudent", said Dai-ichi Life Research Institute chief economist Hideo Kumano.
Core consumer prices contracted 1.2 percent year-on-year for the 12th straight month in February and the BoJ predicts deflation to continue until 2012. The jobless rate has remained close to 5 percent for two straight months.
Under government pressure to combat deflation, the BoJ in March said it would extend emergency steps taken in December by boosting its short-term loan facility to 20 trillion yen (220 billion dollars).
The facility offers three-month loans at 0.1 percent against collateral such as government bonds and corporate debt.
Tokyo has been raising pressure on the bank to do more to beat deflation, which hurts corporate profits and depresses economic activity as consumers delay spending, hoping for further price drops.
Japan has been grappling with deflation since the late 1990s when an asset bubble burst, ending years of booming growth, while an ageing population that is reluctant to spend has added to the downward pressure on prices.