Japan’s central bank cut its economic growth forecast yesterday to 1.5 percent for this fiscal year and softened its previous monetary policy stance of raising interest rates gradually.
“Japan’s economic growth is slowing, mainly due to the effects of high energy and materials prices,” the Bank of Japan (BoJ) said in a biannual health check of the world’s second largest economy.
In October it had forecast economic growth of 2.1 percent for this fiscal year. Growth is now expected to pick up to about 1.7 percent in the next fiscal year to March 2010, the BoJ said.
“The pace of economic growth has decelerated mainly due to the drop in housing investment and the effects of high energy and materials prices,” it said.
“There have been increased down-side risks to the economy stemming from uncertainties regarding future developments in overseas economies and global financial markets as well as the effects of high energy and materials prices,” it said.
Consumer prices, excluding fresh food, are expected to rise by 1.1 percent this fiscal year and by 1 percent next year as energy costs lift Asia’s largest economy out of its long period of deflation.
The central bank softened its previous stance taken under former governor Toshihiko Fukui — who had been in favor of gradual interest rate rises — by signaling a more flexible approach. Fukui stepped down last month.
The bank said its “basic thinking had been that given the extremely low level of short-term interest rates relative to the economy’s potential growth rate and inflation, these were to be raised if Japan’s economy was to follow a path of sustainable growth with price stability.”
But it has now decided that “given the current situation where the outlook for economic activity and prices is highly uncertain, it is not appropriate to predetermine the direction of future monetary policy,” the BoJ said.
Earlier in the day the BoJ left its key interest rate unchanged at 0.5 percent, where it has been since February last year.
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