Bank of Japan Leaves Key Rate Unchanged At 0.3%, To Infuse More Capital In Money Markets

November 21, 2008 5:42 a.m. EST

Tokyo, Japan (AHN) - The Bank of Japan has decided to keep the key benchmark interest rate unchanged at 0.3 percent as the authorities have plans to infuse more capital into the money markets.

The government and regulators had slashed key interest rate from 0.5 percent to 0.3 percent last month for the first time in seven years, which made the central bank more difficult to further cut the benchmark rate so soon.

"Economic activity has been increasingly sluggish due to the effects of earlier increases in energy and materials prices and the decrease in exports, and this situation will likely persist over the next several quarters," Japan's central bank said in a statement on Friday.

Bank of Japan Governor Masaaki Shirakawa has reteriated in the past that the country still can survive the credit-market turmoil and subprime mortgage problem as health of the corporate sector is still strong.

But according to him the economic growth will remain sluggish over the next few months as the exports of domestic products have declined and commodity prices have gone up to a considerable amount.

Japan's core inflation, excluding fresh food prices, increased to 2.5 percent in the month compared to the year earlier. The Bank of Japan expects the CPI inflation rate to moderate reflecting the declines in the prices of petroleum products and stabilization in the prices of food.

"However, the outlook remains highly uncertain and given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan's economic recovery to be satisfied," the central bank said in the statement.

It added, "If financial conditions, as reflected in lending attitudes of financial institutions and issuing conditions in the corporate bond and CP [commercial paper] markets, should increase in severity, pressures acting to depress economic activity from the financial side may become more marked."

Upside risks have declined and there is a possibility that the inflation rate will drop further, if downside risks to economic activity materialize or commodity prices fall further, the central bank said.

The bank added that the authorities will ensure market stability by conducting appropriate money market operations, including the provision of sufficient funds over the year-end and the fiscal year-end.

It will continue purchasing commercial papers under repurchase agreements more flexibly to facilitate corporate financing.