BOJ Keeps Interest Rate at 0.5%

The Bank of Japan cut its economic growth forecast, raised its inflation estimate and kept the benchmark interest rate at 0.5 percent, saying higher commodity prices are hurting the expansion.

The world's second-largest economy will grow 1.2 percent in the year ending March 31, slower than the 1.5 percent forecast on April 30, the central bank said in a statement in Tokyo. Consumer prices excluding fresh food will climb 1.8 percent, more than the 1.1 percent projected three months ago, it said.

Growth is ``slowing further'' because higher energy and raw-materials costs are discouraging businesses and consumers from spending, the bank said. ``Downside risks to the economy demand attention,'' it said, indicating the bank has no plans to resume a policy of gradually raising interest rates anytime soon.

In April, the central bank shelved a policy calling for higher borrowing costs. The benchmark rate, doubled in February 2007, is the lowest among major economies.

``Economic growth is slowing further, reflecting weaker growth in business fixed investment and private consumption against the backdrop of high energy and materials prices,'' the central bank said. Still, Governor Masaaki Shirakawa said the economy ``is not facing stagflation'' because growth will pick up and inflation will moderate.

Gross domestic product will expand 1.5 percent in the year starting April 1 and core consumer prices will rise 1.1 percent, the policy board forecast.

The biggest reason for Japan's economic slowdown is the worsening terms of trade spurred by higher import prices, the governor said. Commodities costs drained 1 percent from national income between 2000 and 2007, the Cabinet Office said last month. Japan imports almost all of its oil and 60 percent of its food.

Shirakawa said the central bank hasn't seen any signs of ``second-round effects of inflation,'' in which surging oil and commodity prices spread to other goods and services. The bank needs to watch whether secondary inflation will arise, he added.

The bank said it's ``necessary to be mindful of upside risks due to changes in the inflation expectations of households and the price-setting behavior of firms.''

Consumer prices excluding fresh fish, fruit and vegetables rose 1.5 percent in May from a year earlier, the fastest pace in a decade, and economists say the inflation measure will soon surpass 2 percent. The Bank of Japan regards core prices as stable when they are between zero and 2 percent.

Gains in core prices will ``gradually moderate'' after they become ``somewhat elevated in coming months'' because of oil and food, the central bank said. Should economic risks subside, Japan's expansion may become vulnerable to the side effects of keeping rates too low, it said.

BOJ Keeps Interest Rate at 0.5%, Bloomberg
7/15/2008 6:39:18 AM