Japan central bank extends emergency credit steps

Japan central bank extends emergency credit steps

Tokyo: Japan’s central bank said on Wednesday that while the economy has ended its slide, it would extend a series of emergency measures to ensure that credit keeps flowing to companies.

The Bank of Japan’s eight-member policy board also voted unanimously to leave its overnight call rate target unchanged at 0.1%, as widely expected by the market.

“Japan’s economic conditions have stopped worsening," Bank of Japan Gov. Masaaki Shirakawa said. “Public investment is increasing and exports and production are picking up. Business sentiment, especially of large manufacturing firms, has stopped deteriorating."

The world’s second-biggest economy will begin recovering in the second half of this fiscal year through March 2010, the central bank said. Japan’s gross domestic product fell at a record annual pace of 14.2% in the first quarter.

Its assessment follows a similar upgrade earlier this week in a monthly report from the cabinet office. The government predicted better news in the coming months thanks to massive fiscal stimulus measures.

Still, the central bank warned of ongoing pockets of weakness that could undermine a recovery. Capital spending by companies is falling sharply. Private consumption, which accounts for more than half of the country’s gross domestic product, remains lackluster as unemployment rises.

In May, Japan’s jobless rate hit 5.2% the highest level in five and a half years.

The fragility led policy board members to slightly reign in their economic forecasts.

They now expect real GDP to shrink 3.4% this fiscal year instead of the 3.1% decline projected in April. In the year through March 2011, they predict GDP will grow one percent, down from an earlier forecast of 1.2%.

Financial conditions are also “headed in the right direction but remain tight," Shirakawa said. Policy board members thus decided to continue several emergency liquidity programs beyond their original 30 September expiration date.

The central bank said it will buy commercial paper and corporate bonds for three extra months to 31 December. It will also extend a special lending program offering banks low-interest loans with eligible collateral.

The steps were among those introduced in the wake of last year’s global financial crisis and credit crunch. With interest rates close to zero, the central bank had little room to tweak regular monetary policy and instead focused on less conventional measures to help cash-strapped companies.

Japan’s interest rates are among the lowest of major economies. The Federal Reserve’s targeted range hovers between zero and 0.25%, while the European Central Bank held its benchmark rate at one percent at its last meeting.