BOJ Signals Economic Concern Even After Raising View

By Mayumi Otsuma

Sept. 17 (Bloomberg) -- Japan’s central bank policy makers said they remain concerned about the strength of a recovery even after raising their assessment of the nation’s economy.

Officials kept the benchmark overnight lending rate at 0.1 percent, and maintained their emergency lending programs to banks and companies. While describing the economy as “showing signs of recovery,” an upgrade from the “stopped worsening” assessment last month, the Bank of Japan said in a statement in Tokyo today that it still sees “downside” risks to growth.

Today’s statement reflected global doubts about the strength of a recovery from the deepest recession since the Great Depression. A Bloomberg News poll of U.S. households published today showed Americans plan to refrain from boosting spending even after the biggest drop in consumption in 29 years.

“Most countries are experiencing a recovery, but few can be confident about the sustainability of those recoveries,” said Yoshiki Shinke, a senior economist at Dai-Ichi Research Life Institute in Tokyo. “Japan will be the last country to raise its interest rate” because it has the added problem of deflation, he said.

Bank of Japan Governor Masaaki Shirakawa told reporters in Tokyo today that while stimulus measures have helped the economy improve, “we’re not confident about the strength of private final demand after those effects fade.” He added that central bankers are monitoring the appreciating exchange rate, which is contributing to the drop in Japanese consumer prices.

Yen Rises

The yen has climbed 4.3 percent against the dollar in the past month, and reaching 90.13 yesterday, its highest level since Feb. 12. Currency gains may erode Japanese exporters’ earnings and make it harder for the nation’s growth to accelerate. Currencies should move in a stable manner, Shirakawa said today.

Japanese stocks initially pared gains after the central bank statement, before recouping their advance. The Nikkei 225 Stock Average rose 1.7 percent at the close in Tokyo. The yen traded at 90.61 per dollar, up from 90.93 late yesterday.

The bank’s policy board said consumer spending remains weak and companies are still reducing investment because of falling profits. Financial conditions are showing signs of improvement “with some severity lingering,” the central bank said.

“While there are signs of a better-than-projected recovery in emerging economies, risks to the economy are still on the downside,” the bank said. “The outlook is attended by a significant level of uncertainty stemming mainly from developments in global financial markets.”

Return to Growth

Japan’s economy grew in the second quarter for the first time in more than a year, helped by some $2 trillion in global stimulus that bolstered exports and household spending.

Reports today showed Japanese manufacturers turned optimistic for the first time in almost two years and demand for services rose for a second month in July. Yet the recovery from the country’s worst postwar recession remains hampered by record unemployment, falling wages and consumer-price declines that threaten companies’ profits.

The value of households’ financial assets slid 3 percent from a year earlier to 1,441 trillion yen ($15.8 trillion) last quarter, the Bank of Japan said earlier today.

“Consumer spending will remain sluggish and deflationary pressure will mount,” said Akio Makabe, a professor of economics at Shinshu University in Matsumoto, central Japan. “Companies will continue to carry idle capacity and face pressure to streamline operations.”

Confidence Measure

A survey of Bloomberg users showed little change in global confidence in September from last month. The Bloomberg Professional Global Confidence Index was at 58.54, remaining above 50, which means optimists outnumbered pessimists.

Since its most recent rate cut in December, the Bank of Japan started buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board extended the measures until Dec. 31 in July, saying funding conditions remain “tight.”

Masaaki Kanno, a former central bank official, said today’s upgrade to the economic assessment indicated the policy board may start discussing an end to the programs.

“Although we are nowhere near a phase where we can discuss prospects of tightening interest rates, the BOJ may want to start debate on the possibility of suspending, terminating or canceling part of its corporate fund-raising measures sooner rather than later,” said Kanno, who is now chief economist at JPMorgan Chase & Co. in Tokyo.

Rate Outlook

The central bank will hold the key rate at 0.1 percent at least through the end of 2010, according to 14 of 16 economists surveyed this month.

Consumer prices excluding fresh food fell a record 2.2 percent in July, and policy makers are likely to forecast the slide will extend into 2011 in their twice-annual outlook next month. They consider prices to be stable within a range of zero to 2 percent.

Economists say Shirakawa may face pressure from the Democratic Party of Japan, which took power yesterday, to increase the central bank’s monthly purchases of government bonds. While the DPJ has said it supports the Bank of Japan’s independence, the government may need to sell debt to pay for promises to provide child care benefits and cut taxes.

“The issue of an increase in the bank’s bond purchases may gain momentum if the government finds it has to sell more debt to make up for a shortage of revenue,” said Tetsufumi Yamakawa, chief Japan economist at Goldman Sachs Group Inc.

The central bank currently buys 1.8 trillion yen ($20 billion) of the securities each month.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net