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August 12, 2009

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Bank of Japan acts cautiously and keeps interest rate low

JAPAN'S central bank kept its key interest rate unchanged at 0.1 percent yesterday, and maintained a cautious view on the strength of recovery in the world's second-largest economy.

The Bank of Japan's policy board voted unanimously to keep the overnight call rate unchanged at the end of a two-day meeting. Markets had expected no change.

In South Korea, the central bank also left its key interest rate unchanged at a record low of 2 percent for the sixth straight month.

Both banks pointed to signs of a gradual recovery but remained cautious about the outlook for the export-dependent Asian economies.

The Bank of Japan said "economic conditions have stopped worsening" but warned unemployment remained high and consumer spending was lagging.

A lingering problem for Japan, even as manufacturing recovers from the global economic downturn, is its unemployment rate, which reached a six-year high in June of 5.4 percent, rising from 5.2 percent in May.

Hiroshi Shiraishi, economist at BNP Paribas in Tokyo, said the BOJ was unlikely to raise interest rates for some time because of worries about the rebound running out of steam in coming months.

The recent good news about an improvement in manufacturing could be short-lived, he said, because it was driven by the temporary effects of government stimulus measures and companies around the world rebuilding severely depleted inventories.

"We are expecting the rebound to slow down somewhat later this year or early next year," Shiraishi said.

The central bank has kept its key rate unchanged at near zero since December, when it cut the rate from 0.3 percent.

Bank of Japan Governor Masaaki Shirakawa struck a cautionary note, noting that consumer spending was up in green cars and flat-panel TVs, which have been boosted by government incentives, but remained sluggish at department stores and supermarkets.

"The improved spending has been limited in scope," he said. "Even if we are undergoing a recovery, we cannot be certain of its strength."

The Cabinet Office was also cautious in a monthly economic report released yesterday, saying the economy was "picking up" but remained in a "difficult situation."

Japanese exports and industrial production were rebounding, indicating that the worst of the recession may be over, but unemployment was worsening, the report said.

The benchmark index for Tokyo shares, the Nikkei, extended its rally for the fourth day and rose to a fresh 10-month high yesterday.


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