BOJ holds key rate at 0.1%, says won't tolerate deflation+

TOKYO, Dec. 18 Kyodo -
The Bank of Japan decided Friday to keep its key interest rate steady at 0.1
percent and reinforced its pledge to help the nation move out of deflation by
maintaining an easy monetary policy.
At a two-day policy meeting, the BOJ's seven-member Policy Board reviewed its
medium-term price stability target and made clear that the BOJ will not
tolerate the consumer price index being at zero percent or below amid concerns
that deflation, together with a strong yen, could hamper the nation's economic
recovery.
''The bank recognizes that it is a critical challenge for Japan's economy to
overcome deflation and return to a sustainable growth path with price
stability,'' the BOJ said in a statement, adding it would maintain an extremely
accommodative financial environment.
The policymakers believe that the desirable medium- to long-term price
stability would see the consumer price index stabilizing in a positive range of
up to 2 percent, the BOJ said.
Previously, the policymakers considered price movements as stable when the CPI
is in the range of ''approximately'' zero to 2 percent, not exactly ruling out
zero and slight minus changes and leading some to wonder whether the bank may
be tolerant of that level, the BOJ said.
BOJ Governor Masaaki Shirakawa said at a press conference that by disseminating
the bank's view on prices and monetary policy more clearly, there would be
''some effects'' on lowering interest rates.
But the BOJ's clarification of its desirable price target ''does not mean that
we are committed to something in future monetary policy,'' Shirakawa added,
suggesting the BOJ would not promise to maintain its low-interest-rate policy
until consumer prices stabilize at a certain level.
Hideo Kumano, chief economist at the Dai-ichi Life Research Institute, said the
BOJ's tweaked understanding on desirable price level is ''a message aimed at
showing its cooperative attitude to fight deflation together with the
government.''
Having faced pressure from some in the Cabinet members to do more to support
the economy, the BOJ introduced a 10 trillion yen loan program at an emergency
policy meeting about three weeks ago.
Kumano said although the BOJ usually revises its understanding on desirable
price levels in April, tweaking the gauge at this timing is ''unnatural.''
''From now, the BOJ is likely to take a wait-and-see stance to check effects of
the previous meeting's (loan) step and this time's move, and brace for downside
risks,'' in the economy, he said.
The BOJ's latest policy meeting comes at a time when the BOJ has limited room
for adjusting conventional monetary policy with its target rate for unsecured
overnight call money at 0.1 percent. The vote to keep the key rate at that
level was unanimous.
The BOJ last cut the rate from 0.3 percent a year ago at the height of the
global financial crisis.
Shirakawa regarded the BOJ's new loan program as ''having some effects'' on
lowering longer-term interest rates and helping restore market sentiment.
The program was introduced amid heightened concern that the yen's spike to a
14-year high against the U.S. dollar in late November, together with deflation,
may threaten the recovery of the export-oriented Japanese economy.
Under the new funding arrangement, the BOJ will offer a total of 10 trillion
yen to financial institutions in three-month loans at a fixed interest rate of
0.1 percent against such collateral as government bonds and corporate debt.
The central bank has implemented money-market operations twice under the new
funding scheme, offering 800 billion yen each time, and the new program proved
to be popular with bids sharply exceeding the offered amount.
As for the state of the Japanese economy, the BOJ maintained its basic
assessment of the nation's economy as ''picking up,'' due to the stimulus
measures at home and abroad. The BOJ said business sentiment among companies,
especially major manufacturers, has been improving moderately with the decline
in capital investments coming to a halt. But public investments have started to
level off, it said.
In the end, the central bank maintained its outlook that the pace of
improvement in the economy is likely to remain ''moderate'' until around the
middle of fiscal 2010.
==Kyodo