BOJ’s Shirakawa Says Japanese Recovery Is Likely to Be Weak

By Mayumi Otsuma and Toru Fujioka

Aug. 11 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa said any recovery in the world’s second-largest economy is likely to be weak because there’s no guarantee that demand will gain momentum once global stimulus programs fade.

“Even if we have a recovery, I don’t think it’s strength will be impressive,” Shirakawa told reporters in Tokyo today after his board kept the key interest rate at 0.1 percent. “I can’t be confident about the strength of final demand after inventory adjustments and policy measures run their course.”

The Bank of Japan said it remains concerned about “downside risks to economic activity and prices” even as the country’s deepest postwar recession abates. While exports and production are improving, spending by companies and consumers remains sluggish and the outlook is “attended by a significant level of uncertainty,” the central bank said.

“The decision to keep the current rate reflects how careful and conservative the central bank remains about the economic recovery,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “The bank won’t likely raise the rate at least until late 2010.”

The yen traded at 96.87 per dollar at 5:35 p.m. in Tokyo from 96.65 before the policy announcement. The yield on Japan’s 10-year bond fell one basis point to 1.445 percent. The Nikkei 225 Stock Average rose 0.6 percent, extending its rally to 50 percent since it reached a 26-year low in March.

No New Steps

Shirakawa and his colleagues refrained from unveiling new measures a month after they extended credit-easing programs until the end of 2009. The central bank’s rate decision was expected by all 22 economists surveyed by Bloomberg News.

The policy board said the economy has “stopped worsening,” leaving its view unchanged from a month ago. Investment by companies is “declining sharply” and household consumption “remains generally weak amid the worsening employment and income situation,” it said in a statement.

The government also left its monthly economic assessment unchanged today, saying it’s “picking up recently,” yet conditions are still “difficult.” Prime Minister Taro Aso’s ruling Liberal Democratic Party trails the opposition Democratic Party of Japan in polls ahead of an Aug. 30 election.

Aso’s 25 trillion yen ($262 billion) in stimulus measures helped consumer confidence climb for a seventh month in June, a Cabinet Office report showed today. The economy probably expanded 3.9 percent in the three months ended June 30 after contracting for four quarters, analysts predict a report will show next week.

Excess Workers

Even so, growth may not be sustained because companies still have spare capacity and employees.

“These excesses will continue to weigh on consumer spending and capital investment,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. Japan’s jobless rate climbed to a six-year high of 5.4 percent in June.

Shirakawa said that while consumer prices are falling at a faster pace, that’s unlikely to snowball.

“We don’t see a risk of a deflationary spiral now, however price declines have accelerated in recent months, and that warrants close and careful monitoring,” he said.

Policy makers may forecast later this year that deflation will extend into 2011, and economists say that will force them to prolong their policy of keeping rates near zero. Consumer prices excluding fresh food slid a record 1.7 percent in June.

Shirakawa said prices are falling worldwide because of a dearth of demand and excess supply in the wake of the global economic crisis. It will take “considerable time” before price drops moderate, he said.

Global Stimulus

More than $2 trillion in stimulus measures have helped to ease the worst global recession since the Great Depression.

China’s industrial output and retail sales grew more quickly in July, while exports slumped, reports showed today, underscoring that economy’s dependence on stimulus spending and record bank lending. Elsewhere in Asia, the Bank of Korea left its benchmark rate at a record low of 2 percent on signs of a recovery. Singapore’s economy expanded at an annual 20.7 percent pace last quarter, revised figures showed.

Japan’s key rate will stay unchanged at least through 2010, according to 12 of 16 economists surveyed by Bloomberg News. The Bank of Japan last lowered the rate in December and has since begun purchasing corporate debt and providing unlimited loans backed by collateral to lenders. The central bank last month extended the credit programs by three months to Dec. 31.

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net