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September 18, 2009

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BOJ sees basis for optimism

THE Bank of Japan said yesterday it was slightly more optimistic about economic and financial conditions, bringing it a step closer to phasing out support for corporate funding.

The central bank also dismissed concerns that a rallying yen would threaten economic recovery, with Governor Masaaki Shirakawa toeing the finance minister's line that a stronger currency may do more good than harm. The remark pushed the yen up against the US dollar.

Both were signs of growing confidence at the BOJ, as at other major central banks, that the global economy was emerging from the trough created by the credit crisis that triggered bank failures in Europe and the United States last year.

Shirakawa said the central bank's intervention in the corporate finance market was designed to deal with a severe crisis that has passed, suggesting that there was now less need for them.

"As for financial conditions, we've made a step forward in our assessment," Shirakawa said, although he added that he remained cautious about Japan's economic outlook.

But record deflation, rising job losses and weak capital spending all look set to cloud the debate on the timing of the BOJ's exit from the corporate finance market, where it has been buying commercial paper and corporate bonds from banks.

"Shirakawa's comments on improving corporate finance suggest the BOJ may end some of its corporate funding-support measures as they expire in December," said Masamichi Adachi, senior economist at JPMorgan Securities. "But there's a chance it will keep them intact to avoid sending any negative message to markets."

The central bank kept interest rates on hold at 0.1 percent as expected, and it is seen keeping them near zero at least until 2011.

Central banks around the world have begun debating how and when to phase out their emergency steps to contain the damage wrought by the worst global financial crisis in decades. Most are not expected to do so until well into next year.

US Federal Reserve Chairman Ben Bernanke said on Tuesday that the worst American recession since the Great Depression was probably over, but the recovery would be slow.


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