Bank of Japan Statement
At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, intermeeting period:
1. The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent.
2. Japan's economy continues to face downward pressure, mainly on the production side, due to the effects of the earthquake disaster, but is showing some signs of picking up. After the earthquake, production and exports declined sharply and domestic private demand also weakened. Although such downward pressure remains, production and domestic private demand have recently been showing some signs of picking up, with supply-side constraints starting to ease and household and business sentiment improving somewhat. Meanwhile, financial conditions have generally continued to ease, although weakness has been observed in the financial positions of some firms, mainly small ones, since the earthquake. The year-on-year rate of change in the CPI (excluding fresh food) is slightly positive.
3. Japan's economy is likely to continue facing downward pressure for the time being, mainly on the production side. Thereafter, production is likely to regain traction with further easing of supply-side constraints. From the second half of fiscal 2011, the economy is expected to return to a moderate recovery path, backed by an increase in exports reflecting the improvement in overseas economic conditions and by a rise in demand for restoring capital stock. The year-on-year rate of change in the CPI is expected to remain slightly positive.
4. Regarding risks to the economic outlook, there is a high degree of uncertainty about the effects of the earthquake disaster on Japan's economy. With regard to overseas economies, the effects of balance-sheet adjustments on the U.S. economy and the possible consequences of the sovereign risk problems in Europe continue to warrant attention. Despite some signs of deceleration, there is still upside risk to the growth prospect of emerging and commodity-exporting economies. Meanwhile, turning to the implications of the rise in international commodity prices, on the one hand, the high growth in emerging and commodity-exporting economies that lies behind the price rise is likely to provide a boost to
Japan's exports; on the other hand, the decline in real purchasing power resulting from the deterioration in the terms of trade could reduce domestic private demand in Japan. While there are various risk factors to be considered, attention should be paid for the time being to the downside risks to economic activity, especially the possible effects of the disaster. Regarding risks to the price outlook, inflation could rise more than expected if international commodity prices increase further, while there is also a possibility that the rate of inflation will deviate downward from the Bank's baseline scenario due, for example, to a decline in medium- to long-term inflation expectations.
5. The Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, which was introduced in the summer of last year, has been playing the role of a catalyst in promoting financial institutions' own initiatives. With a view to further encouraging financial institutions' efforts, the Bank deems it appropriate to focus on supporting their provision of equity-like funds and loans without conventional collateral or guarantees. Based on such consideration, the Bank decided at today's meeting to establish a new line of credit for equity investments and the so-called ABL, or asset-based lending. The Bank expects that today's decision will further enhance financial institutions' efforts to strengthen the foundations for economic growth through the use of a wider range of financial techniques.
6. In order for Japan's economy to overcome deflation and return to a sust...