Wednesday April 30, 07:20 AM
Japanese interest rates unchanged, growth set to drop
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TOKYO (AFP) - Japan's central bank said on Wednesday that it had decided to leave its main interest rate unchanged at 0.5 percent at the end of a one-day meeting, amid worries about the health of the global economy.
The news comes as the central bank also cut its economic growth forecast to 1.5 percent for this fiscal year and signalled a shift from its previous policy which had favoured gradual interest rate hikes.
The Bank (NASDAQ: TBHS - news) of Japan in 2006 raised interest rates for the first time in almost six years. It (Frankfurt: A0MLX5 - news) hiked rates again in February last year but has held them steady since then amid worries about the economic climate and financial market volatility.
The decision was made unanimously by seven members of the monetary policy board, which currently has two vacancies.
The BoJ gave no immediate explanation for the decision, which had been widely expected in financial markets.
Central bank (CBSU.PK - news) governor Masaaki Shirakawa, who chaired his first monetary policy meeting since officially taking up the top post earlier this month, was due to hold a press conference later in the day.
Japan's central bank is expected to cut its forecast for 2.1 percent economic growth in this fiscal year to March later Wednesday when it releases its twice-yearly outlook for the economy and consumer prices.
Analysts also expect the BoJ to soften its previous stance under former governor Toshihiko Fukui in favour of gradual interest rate rises.
"The BoJ is making an adjustment from its earlier hawkish stance," said Lehman Brothers (NYSE: LEH - news) economist Hiroshi Shiraishi.
Reflecting the fragile health of Asia's largest economy, the government reported earlier in the day that Japan's factory output fell by 3.1 percent in March, the fastest pace in five years, amid a decline in US-bound exports.
Many economists expect the BoJ to leave interest rates unchanged at 0.5 percent for the foreseeable future, although some still see a chance of a rate hike later this year after inflation hit a decade high of 1.2 percent in March.
"The bank will probably keep rates on hold for a few months yet to gauge the extent of the US recession and the fallout for the Japanese economy," analyst Julian Jessop of Capital Economics in London wrote in a note to clients.
"But we expect the next quarter point hike later in the year, perhaps as soon as September," he added, predicting rates would rise to about 2.0 percent by early 2010.
Japan's central bank for years battled to end deflation with an unprecedented policy of virtually free credit.
But the return of inflation in Asia's largest economy has also been met with concern among policymakers because it is being driven by rising oil and food costs that are making life tougher for households and companies.
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