BOJ leaves key rate unchanged

As widely expected, the Bank of Japan (BOJ) left its benchmark interest rate unchanged at 0.1%. The policy-setting board of Japan's central bank voted unanimously to leave borrowing costs steady. The BOJ also maintained its overall view for the world's second-largest economy, and didn't issue any new policy initiatives, though it repeated the pledge to do all it could to pull Japan out of deflation. The policy board kept the loan facility for commercial banks and monthly purchases of government bonds unchanged, keeping the powder dry just in case it faces dire situation on deflation going forward.

Given the fiscal deterioration, the BOJ will face increasing pressure to tackle deflation. Prime Minister Yukio Hatoyama’s government may find little room to maneuver fiscal spending and instead put more heat on the central bank to prop up the economy ahead of a July election. Finance Minister Naoto Kan said this week in parliament that Japan should adopt a policy target of achieving 1% inflation and the government wants to work with the bank to spur prices.

The policy board kept its assessment of the Japanese economy unchanged at the meeting, saying that it is picking up. There is not yet sufficient momentum to support a self-sustaining recovery, the BOJ said. It also reiterated that beating deflation is a critical challenge for the economy and the bank will aim to maintain the extremely accommodative financial environment.