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Bank of Japan says preventing deflation crucial to recovery
By Jay Alabaster |
December 19, 2009, Saturday
|
Print Edition
Print Edition
JAPAN'S central bank said yesterday that it was crucial for the country to beat deflation and that it would not accept continued price declines.
"It is a critical challenge for Japan's economy to overcome deflation and return to a sustainable growth path with price stability," the bank said in a statement after a regular two-day policy meeting.
Bank of Japan policy members also voted unanimously to hold its key interest rate unchanged at 0.1 percent, as widely expected, to support a recovery in the world's No. 2 economy.
The central bank's statement on deflation came after pressure from the government for a more proactive stance. Earlier this month, Prime Minister Yukio Hatoyama and Bank of Japan Governor Masaaki Shirakawa met to discuss the problem, after which Hatoyama said they pledged to quickly take action.
The core consumer prices index fell at a near record pace of 2.2 percent in October from a year earlier, the eighth straight month of decline.
Deflation can drag down an economy by lowering company profits, leading to wage cuts and postponed purchases by wary consumers. Japan is especially sensitive to the issue after experiencing the "Lost Decade" in the 1990s, when it was beset by extended price falls.
Japan's recovery - recently revealed as less robust than first thought - is also facing other headwinds, including a strong yen which hurts the competitiveness of exporters such as Toyota Motor Corp and Sony Corp.
Earlier this month, the government cut its estimate of third-quarter growth to an annualized 1.3 percent from 4.8 percent.
The bank said it "does not tolerate" a situation in which the country's main price index remains flat or decreases on a yearly basis.
It said it will maintain an "extremely accommodative financial environment" and make policy moves as needed to keep prices from falling.
The bank also noted the risk that financial events abroad could affect Japan's recovery, possibly by hurting overall business sentiment.
Several credit agencies have lowered their ratings on Greece, which is dealing with its biggest debt crisis in decades. And last month financial markets worldwide retreated on the news that the major government investment company in Dubai would suspend debt payments.
Overall, Japan's central bank maintained its assessment that the nation's economy continues to recover.
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