Bank of Japan Holds Fire, Unfazed by Recession

The Bank of Japan kept monetary policy steady on Friday in a sign that a first-quarter economic slump did not change the central bank's view that growth will pick up late this year when the wounds from the devastating earthquake begin to heal.

In a surprise move, Deputy Governor Kiyohiko Nishimura dropped his proposal to loosen policy further with an expansion of the central bank's asset-buying scheme. He made such a proposal last month but was voted down by an 8-to-1 margin. 

As widely expected, the BOJ kept interest rates unchanged at a range of zero to 0.1 percent by a unanimous vote and maintained the 10 trillion yen limit ($122 billion) for its asset buying scheme, which now serves as its main policy tool. 

The central bank maintained its assessment of the economy, which it said faced strong downward pressure due to the impact of the March 11 earthquake.

It also repeated that it will focus on risks to growth, signalling that it stands ready to ease monetary policy further if the quake's damage proves bigger than expected. 

The world's third largest economy economy shrank much more than expected in the first quarter and stumbled into its second recession in three years after the triple blow of a magnitude 9.0 earthquake, tsunami and nuclear crisis hit business and consumer spending and tore apart manufacturers' supply networks. 

However, the BOJ sees the current downturn as a temporary rough patch, a view shared by Economics Minister Kaoru Yosano, and focuses more on whether the economy will resume a recovery in the second half of this year as it projects.

That means that the BOJ will wait for more clues on the timing of the recovery, and use its limited policy options only if a sudden market shock or prolonged disruptions to output hurt
sentiment and spending. 

Ultra-Loose Bias

Still, some analysts see a good chance supply bottlenecks caused by the quake will force the central bank's hand if they persist for several months, hurting output and exports.

While no further easing appears imminent, the BOJ is expected to maintain its ultra-loose policy bias for at least another year even as other central banks, such as the Federal Reserve and the European Central Bank, start to roll back huge stimulus activated after the collapse of Lehman Brothers late in 2008. 

Given risks to recovery, such as a threat of power shortages during the summer, BOJ Governor Masaaki Shirakawa is expected to stress the bank's readiness to ease policy further if Japan
struggles to return to growth when he elaborates on the decision later in the day.

Any further easing would come through topping up of the BOJ's asset buying programme, although some in the bank would like to focus more on directly supporting rebuilding efforts in
the quake-hit northeast. 

The board may have discussed what measures would be feasible at the meeting and Shirakawa may offer some clues when he holds a news conference later on Friday.

The BOJ eased policy days after the quake by doubling the funds set aside for purchases of a range of financial assets including government bonds and corporate debt.

It has held monetary policy on hold since then and has so far purchased nearly 4 trillion yen worth of assets.