Japan maintains 0.1% interest rates, voices deflation fears
Posted: 20 November 2009 1322 hrs

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TOKYO: Japan's central bank announced Friday that it was leaving its super-low interest rates unchanged at 0.1 per cent, in the face of mounting concerns about deflation in Asia's biggest economy.

"Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although the momentum of self-sustaining recovery in domestic private demand remains weak," the Bank of Japan said in a statement.

"The Bank will provide steady support for Japan's economy to return to a sustainable growth path with price stability," it added.

Japan's economy posted its strongest growth in more than two years during the third quarter of 2009, expanding 1.2 per cent from the previous three-month period.

But there are concerns the recovery could lose steam as the boost from the government's pump-priming efforts fades.

Renewed deflation is also seen as a threat to the recovery, with the central bank predicting three straight years of falling consumer prices.

The government was expected to declare in a monthly report Friday - for the first time in more than three years - that Japan is in a state of deflation.

"The recent price falls are not right and worrisome. This is one of the major policy issues right now," Finance Minister Hirohisa Fujii told a news conference.

Fujii dismissed the idea that government spending could solve the problem, saying public works projects would not lead to higher prices.

Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, hitting corporate earnings and prompting consumers to put off purchases in the hope of further price drops.

The current global economic downturn and a slump in commodity costs pushed Asia's biggest economy back into the deflationary doldrums. Core consumer prices have now fallen year-on-year for seven months in a row.

Japan's deputy prime minister said that the government would convey its worries about falling prices to the central bank.

"The country is in a deflationary state. We are going to tell our economic views to the Bank of Japan," Naoto Kan told reporters Friday.

The Bank of Japan announced last month it would halt some of its emergency measures to tackle the financial crisis at the end of the year, despite pressure from the government not to withdraw its stimulus steps too soon.

- AFP/yb