BOJ Keeps Key Rate at 0.5%


The Bank of Japan kept interest rates on hold at the first meeting after slashing its growth estimate and shelving a two-year policy of seeking higher borrowing costs.

Governor Masaaki Shirakawa and his six colleagues unanimously voted to leave the overnight lending rate at 0.5 percent in the quickest decision in three years, the central bank said in Tokyo. The rate is the lowest among major economies.

Shirakawa said the world's second-largest economy ``is clearly slowing'' and the central bank will implement policy ``in a flexible manner.'' Board members are focusing on the risk that record oil and raw-materials costs will cause companies and consumers to pare spending, he told reporters.

``Japan's economic growth is slowing, mainly due to the effects of high energy and materials prices,'' the central bank said, keeping its assessment of the economy unchanged even after a report last week showed gross domestic product expanded 3.3 percent last quarter, the fastest pace in a year.

Exports rose at the slowest pace in almost three years in March. Production fell the most in at least five years. Machine orders, an indicator of business investment in the next three to six months, also declined, and are forecast to drop this quarter.

Costlier oil and raw materials are squeezing profits and eroding household incomes. Japanese companies' pretax profits will decline 5 percent in the year ending March 2009, ending a seven-year streak of growth, Shinko Research Institute data showed this week.

The Bank of Japan dropped a call for gradual rate increases in its twice-yearly outlook on April 30 and cut its estimate for this fiscal year's expansion to 1.5 percent from 2.1 percent. It said consumer prices excluding fresh food will climb 1.1 percent, raising its inflation projection from 0.4 percent.

Before dropping language in April that said the bank would pursue higher interest rates, policy makers had for two years repeated that borrowing costs need to rise gradually as long as the economy keeps growing and prices remain stable. The report retained a warning that keeping rates low could cause excessive investment and hamper growth in the long run.


TradingEconomics.com, Bloomberg
5/20/2008 6:35:25 AM