Japan's central bank today said it saw signs of 'moderate' recovery in the world's number two economy, but a rising yen faned fears for the country's export-led rebound from a deep recession.
Keeping its key interest rate unchanged at 0.1%, the Bank of Japan said that 'the economy is likely to be on a recovery trend,' thanks to the country's rising exports, driven particularly by emerging Asia.
It also announced details of a scheme to encourage commercial banks to lend to companies in growth industries in order to strengthen the foundations for economic growth' as the country battles deflation and weak domestic demand.
'Our country's economy is gradually recovering,' the Bank of Japan governor Masaaki Shirakawa said.
But fears grew for Japan's exporters after heightened anxiety over European debt and doubts over the strength of the US economy sent investors piling into the safe haven yen, prompting it to soar.
Japanese Finance Minister Naoto Kan said today that the 'excessive rise of the yen was not desirable', as the safe-haven currency rapidly gained strength.
A strong yen is a worry for Japan because it reduces repatriated profits of exporters who are driving the country's tentative recovery from deep recession, while making their goods more costly in overseas markets.
Despite its generally upbeat assessment, the central bank warned of downside risks to the country's export-driven recovery and pointed to the potential impact of the effects of the euro zone debt crisis on Japan's economic activity.
'In this regard, attention should be paid to the effects of developments regarding fiscal conditions in some European economies,' it said.
The bank's statement came a day after data showing Japan's economy grew an annualised 4.9% in the first three months of the year, a figure that was below analysts expectations.
Soaring welfare costs of a greying population and deflation continue to burden Japan, as falling consumer prices encourage consumers to defer purchases in the hope of further price drops.
'Japan's economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability,' the bank said, adding it will maintain the 'extremely accommodative financial environment'.
