BOJ Raises Economic Assessment, Sees Recovery Signs

The Bank of Japan raised its assessment of the economy and held the benchmark interest rate close to zero percent as it seeks to strengthen the recovery.
“Japan’s economic conditions are showing signs of recovery,” the central bank said in a statement in Tokyo today, after last month saying they had “stopped worsening.” Governor Masaaki Shirakawa and his colleagues kept the overnight lending rate at 0.1 percent at the policy board meeting.
Reports today showed the economy is rebounding from its worst postwar recession: manufacturers turned optimistic for the first time in almost two years and demand for services rose for a second month in July. The revival has been driven by global stimulus spending and Shirakawa said on Aug. 31 that he’s not yet confident it will continue to improve.
“Even though Japan’s economy is on a recovery path, demand is still weak and the bank seems to think it’s too early to normalize policy measures,” said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo, who used to work at the central bank. He said the policy board will keep the key rate unchanged at least until March 2011.

The yen was little changed, trading at 91.05 per dollar at 12:47 p.m. in Tokyo from 91.01 before the report was published.
The Bank of Japan 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.
Downside Risk
“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, adding it will pay “attention for the time being to the downside risks to economic activity and prices.”
Since its most recent rate cut in December, the central bank started buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board extended the programs until Dec. 31 in July, saying funding conditions remain “tight.”
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. Factories increased output for a fifth month in July as companies rebuilt inventories, and shipments abroad are showing signs of improving as the global recession eases.
Sentiment among large manufacturers rose to 15.5 points this quarter, the highest reading since the survey began in 2004, today’s joint survey by the Cabinet Office and Finance Ministry showed. The tertiary index, a measure of service demand, advanced 0.6 percent from June, the Trade Ministry said.
Tankan Survey
The business confidence report offers a hint of the results likely in the Bank of Japan’s quarterly Tankan survey due Oct. 1. The Tankan will provide policy makers with information on companies’ hiring plans and ability to raise funds a year after the collapse of Lehman Brothers Holdings Inc. caused credit to dry up worldwide.
While some companies are optimistic, the rebound in global demand hasn’t spurred capital investment, and consumer spending may weaken amid record unemployment and falling incomes. 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 today.
“Consumer spending will remain sluggish and deflationary pressure will be 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.”
Hatoyama Government
Yukio Hatoyama became prime minister yesterday after his Democratic Party of Japan won an election on a pledge to support households. While the DPJ has said it supports the Bank of Japan’s independence, economists say the policy board may face pressure from the new administration to increase its monthly purchases of government bonds to fund its spending.
“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.
Deflation may provide an obstacle to raising interest rates even if the economy keeps growing. Japanese authorities 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.
“Japan’s consumer prices have been on a downward trend for a decade,” said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo. “Even if the economy achieves a moderate recovery, it’s difficult to expect expectations for deflation will wane anytime soon.”