Bank of Japan Keeps Interest Rates Unchanged at 0.5%

The Bank of Japan left its monetary policy unchanged at a board meeting on Friday, keeping the overnight call rate target at 0.5% as widely expected by financial markets. The decision by the nine-member board was unanimous.

The decision follows on the heels of inflation data that showed Japanese consumer prices declining more than expected and industrial output falling in March. Separate data on Friday also showed the nation's jobless rate was steady at an 8 1/2-year low and household spending rose slightly, supporting views that the world's second-largest economy remains solid.

"The figures have gone into negative territory more than I expected, which indicates it's become harder for CPI to recover," said Seiji Adachi, a senior economist at Deutsche Securities. "If CPI remains in negative territory until September, the Bank of Japan will be less likely to raise interest rates in September as expected by some market participants," Adachi said.

The BOJ has kept monetary policy intact since raising the key policy rate from 0.25% in February, which was the first rate hike since July last year. Many analysts expect the central bank to wait until around July-September to move.

The core consumer price index (CPI), which excludes volatile fresh food prices, fell 0.3% in March from a year earlier, against economists' consensus forecast for a 0.2% drop. It was the second straight month of decline.

For the fiscal year that ended on March 31, core CPI rose 0.1%, logging two consecutive years of rises.

As many companies in Japan's service sector tend to revise prices at the start of a business year in April, figures for Tokyo core CPI were also in focus.

Core CPI in the Tokyo area, announced a month ahead of the nationwide figures, was flat in April from a year earlier, matching a consensus forecast.

The central bank blames the weak price growth mostly on a downturn in crude oil prices, but says softer energy prices will have a positive impact on the economy.

BOJ Outlook

In addition, the BOJ said that it would gradually raise interest rates while watching the
economy and price conditions.

In a twice-yearly outlook report on the economy and prices, the BOJ Policy Board's median forecast for the core consumer price index (CPI) in fiscal 2007/08 was for a 0.1% increase, lower than a 0.5 percent rise estimated in the previous outlook report in October.

But the board members expect price growth to accelerate ahead, with their median core CPI forecast for fiscal 2008/09 standing at plus 0.5%.

Industrial Production

Industrial production, which had been stagnating in the first few months of this year, fell 0.6% in March from a month earlier, below a median market forecast for a 1.1% rise. Industrial production slipped 1.4% in January-March. But the outlook for industrial output was upbeat.

Manufacturers' output -- the core component of production -- is expected to rise 1.5% in April and to rise 1.4% in May, the trade ministry said.

"It's pretty weak data, and combined with shipment and inventory data it's very, very weak," said Takehiro Sato, a senior economist at Morgan Stanley Japan. "METI's official forecast for April is not so bad, so industrial production for the (next) quarter may be slightly higher," he said.

A flurry of data released on Friday also showed Japan's seasonally adjusted jobless rate was unchanged at 4.0% in March, while overall household spending increased 0.1% in March from a year earlier.