The Bank of Japan will keep interest rates near zero even as downside risks to the economy subside, the central bank governor said, reassuring investors its withdrawal from credit markets does not signal an exit from its ultra-easy monetary policy. The BoJ last week decided to begin withdrawing from credit markets but extended a key loan scheme, earning grudging backing from the finance minister, who had criticised the central bank's economic outlook as too optimistic.
BoJ Governor Masaaki Shirakawa told a forum on Wednesday that stronger growth than expected in emerging nations meant risks to Japan's economy had become more evenly balanced than early in the year, when the BoJ was focusing on risks to growth from the global recession and financial market turmoil.
But with deflation likely to persist and economic activity still low, the BoJ will keep monetary conditions loose to support a fragile economic recovery, he said. "We've decided to end our commercial paper and corporate bond purchases, which were implemented as temporary steps to cope with a sharp credit crunch triggered by the collapse of Lehman Brothers," Shirakawa said. "This is a separate issue from how, through monetary policy, to deal with balance sheet adjustments and ensuing weakness in economic recovery."
Policymakers globally are facing the dilemma of how and when to gradually withdraw the extraordinary stimulus injected into their economies to fend off the global financial crisis. "Shirakawa probably wanted to send out as strong a message as possible that the BoJ was drawing a line between reviewing its support for corporate finance and maintaining very low rates," said Yasunari Ueno, chief market economist at Mizuho Securities.
In a policy review last week, the BoJ extended a low-interest loans scheme by three months from December to March, but said the funding measure would then be stopped. It also decided to end a less used programme of purchasing commercial paper and corporate bonds from banks in December. In the buildup to the meeting, the government had pressed the BoJ to continue its corporate debt buying and other measures. But the central bank argued they were no longer needed because credit markets were on the mend.
Shirakawa said the BoJ was using cautious language to describe the economy because Japan's economic activity was still at 90 percent of its level before the Lehman crisis when measured by gross domestic product, and 80 percent when measured by industrial output.
But the government hardly sees the BoJ's economic view as cautious, with the prime minister instead suggesting it was too optimistic. Some analysts also say the BoJ's forecast of 2.1 percent growth in the year to March 2012, which would be a big jump from projected growth of 1.2 percent in the year to March 2011, was overly optimistic.
"The headline GDP forecast is pretty strong," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "Achieving this isn't impossible. But I can't see why the BoJ could be so sure that economic growth will recover in such a strong way in the latter half of fiscal 2011."
The forecasts were made in the BoJ's half-yearly economic outlook report released last week. Shirakawa defended the bank's growth forecasts when a lawmaker criticised them in parliament as being too strong compared with analysts' predictions.
"The forecasts in the report aren't necessarily optimistic," he told a lower house budget committee on Wednesday. "The impact of balance sheet adjustments is very big, and while the global economy is heading towards a recovery, the pace is very moderate. The same thing goes for Japan's economy." In the report, the central bank also predicted deflation would last for three years, effectively pledging to keep interest rates near zero for as long as necessary.
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