Japan's central bank today kept its key interest rate unchanged at 0.1%, as expected, in order to continue nurturing a moderate recovery, while pledging to combat deflation.
'Japan's economy shows further signs of a moderate recovery,' the bank said in a statement. 'Exports and production have been increasing, albeit at a slower pace.'
The meeting followed last week's decision by the central bank to extend a multi-billion dollar loan programme in response to government pressure to counter the effects of the strong yen on the economy.
The central bank warned today that risks were posed by 'increased uncertainty about the future, especially for the US economy' and that it would 'take policy actions in a timely and appropriate manner'.
Despite crawling out of a severe year-long recession in 2009, Japan's fragile recovery remains beset by deflation, as falling prices prompt consumers to defer purchases in hope of further falls, clouding corporate investment.
High public debt, weak domestic demand and softening exports are also overshadowing a recovery further threatened by the yen's appreciation.
The safe-haven currency's strength puts Japanese exporters at a disadvantage against foreign rivals and erodes repatriated profits. A recent government survey suggested many companies were considering moving production overseas if the yen stayed high, a scenario that could endanger Japan's growth, which slowed to an annualised 0.4% in the second quarter.
For every one-yen rise in the currency's value against the dollar, exporters can lose tens of billions of yen earned overseas when repatriated. The unit recently hit 15-year highs against the dollar, and markets were last week left unimpressed by the central bank's response in expanding its loan scheme, as stocks slumped and the yen rose further following its announcement.
In its second loan expansion since March, the bank said it would offer 10 trillion yen ($118 billion) in six-month low interest loans in addition to 20 trillion yen from December's three-month loan scheme.
