Bank of Japan cuts inflation, growth outlook

The Bank of Japan forecast slower economic growth and abandoned a prediction that consumer prices will increase this year, making it harder to raise the world's lowest borrowing costs.

Prices excluding fresh food will be unchanged in the year ending March 31, the central bank said in its semiannual outlook yesterday in Tokyo. In April it forecast a 0.1 percent gain.

The economy will expand 1.8 percent this year, it said, slower than the 2.1 percent predicted six months ago, in part because of a slump in housing starts following a change in regulations.

Japan's longest expansion in more than 60 years is losing steam as a US housing slump threatens global growth, higher oil prices squeeze profits and stagnant wages fail to spur consumer spending at home. The bank repeated its commitment to increase interest rates as long as the economy keeps expanding and prices resume rising.

"The clear signal is that the BOJ intends to continue to gradually normalize rates," said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. "Realistically speaking, though, it will be difficult to hike rates before the end of this year."

The yen traded at 114.64 per dollar at 4:05 pm in Tokyo from 114.67 before the report was published. The yield on Japan's 10-year bond fell 1.5 basis points to 1.6 percent.

Governor Toshihiko Fukui and his policy board earlier yesterday held the key overnight lending rate at 0.5 percent, the lowest among major economies.

Next year's forecasts

Policymakers also gave forecasts for the fiscal year starting April 2008. Core price will probably rise 0.4 percent and economic growth will accelerate to 2.1 percent in the period, the bank said. In April they predicted inflation of 0.5 percent. The growth projection was unchanged from six months ago.

Keeping rates "very low" for too long could encourage excessive investment and hamper growth over the long term, the policy board said. The bank will "adjust the level of interest rates gradually in accordance with improvements in the economic and price situation," it said, repeating language used in April.

Japan has struggled with deflation that emerged after an asset-price bubble burst in the early 1990s and compelled the central bank to cut interest rates to near zero percent. The bank raised the benchmark rate for the first time in almost six years in July 2006 and doubled it to 0.5 percent in February.

Bloomberg News

(China Daily 11/01/2007 page15)