Japan's central bank left its super-low interest rates unchanged today as the government declared for the first time in more than three years that Asia's biggest economy is in a phase of deflation.
Concerns are mounting that a long bout of falling consumer prices could threaten Japan's recovery from its worst recession in decades, eating into corporate profits and prompting consumers to put off purchases.
'The recent price falls are not right and worrisome. This is one of the major policy issues right now,' Finance Minister Hirohisa Fujii said. The government declared in a monthly report today that Japan is 'in a mild deflationary situation.'
The world's number two economy posted its strongest growth in over two years during the third quarter of 2009, expanding 1.2% 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.
'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.
The central bank, which has predicted three years in a row of falling consumer prices, left its benchmark interest rate unchanged at 0.1% at a two-day meeting that wrapped up today.
'The Bank of Japan intends to firmly help our economy get back to a sustainable recovery by maintaining the current extremely easy monetary measures for now,' the bank's governor Masaaki Shirakawa said.
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.
But Shirakawa denied there was a rift between the bank and the government over monetary policy, saying the bank shares its concern about deflation.
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.
