The Bank of Japan kept interest rates on hold today and maintained its cautious view on the economy, as deepening deflation and weak corporate spending threaten its forecast for a modest economic pick-up later this year.
The BOJ said annual consumer price falls were accelerating, going further than last month, when it said only that prices were declining.
But it said the falls were in reaction to last year's spike in oil prices and it made no mention of how weak demand was weighing on prices, suggesting that deflation was not deepening enough to prompt the BOJ into taking action.
As widely expected, the central bank kept its overnight call rate target at 0.1 per cent by a unanimous vote and held off on new policy initiatives at the two-day rate review.
Markets will be listening carefully to BOJ Governor Masaaki Shirakawa's views on how weak domestic demand could affect the bank's deflation outlook and the timing of its exit from its very low interest rates.
Having extended just last month its unconventional steps to ease corporate funding, the board likely focused on assessing recent data to gauge whether rises in exports and output will be sustained long enough to push the economy back towards a recovery.
The BOJ issued a statement after the meeting in which it maintained its view that Japan's economy has stopped worsening and will pick up in the latter half of the fiscal year to March 2010 as government stimulus steps take effect and overseas economies recover.
But it also repeated its warning that the outlook is highly uncertain as downside risks persist for overseas economies and final demand.
Japan's economy is expected to have grown 1 per cent in April-June after four straight quarters of contraction due to a pickup in exports and personal consumption spurred by stimulus spending at home and abroad, a Reuters poll showed.
But economists warn that any recovery will be fragile because doubts about the sustainability of end demand remain with recent output gains driven mostly by government stimulus.
Industrial output marked a record quarterly rise in April-June. But manufacturers expect core machinery orders to fall in July-September, suggesting they remain wary of expanding their production capacity despite signs of a global economic recovery.
Reuters