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Japan's Central Bank Expands Lending Program

Tuesday, 14 Jun 2011 07:25 AM

Japan's central bank kept its key interest rate unchanged at virtually zero and expanded a lending program to bolster the disaster-hit economy.

The Bank of Japan's nine-member policy board voted unanimously Tuesday to leave the overnight call rate target at zero to 0.1 percent. The decision, made at the two-day meeting, was widely expected.

"Regarding risks to the economic outlook, there is a high degree of uncertainty about the effects of the earthquake disaster on Japan's economy," the board said in its statement.

Japan's economy was hit hard by the March 11 earthquake and tsunami, which damaged factories, wiped out large swaths of the northeast coast and triggered the worst nuclear power accident in Japanese history. Manufacturers struggled with parts shortages, and consumer spending tumbled.

The impact sent the world's No. 3 economy back into recession in the January-March quarter, with gross domestic product contracting at an annualized rate of 3.5 percent.

In its latest attempt to aid the economy, the central bank decided to offer commercial banks 500 billion yen ($6.2 billion) in new credit as part of a measure introduced last year to fuel economic growth.

The low-interest lending facility is designed to encourage private banks to lend money to businesses in growth sectors such as environment, energy, elderly care and tourism. Under the expansion announced Tuesday, the facility now includes equity investments and loans to companies without conventional collateral like real estate.

A finance ministry survey released earlier in the day highlighted the extent of corporate pessimism in Japan.

The sentiment index for large companies with at least 1 billion yen ($12.4 million) in capital fell to minus 22 in the April-June period, worsening from minus 1.1 three months earlier. It was the lowest level in two years.

The figure represents the percentage of companies saying business conditions are deteriorating from those saying conditions are improving.

The central bank said Japan's economy is "likely to continue facing downward pressure for the time being, mainly on the production side." But it upgraded its assessment slightly by adding that the economy is "showing some signs of picking up."

Production is likely to regain traction as supply constraints ease, and the economy is expected to return to a moderate recovery path in the second half of this fiscal year, the Bank of Japan said.

It pledged to contribute its utmost as a central bank through its three-pronged approach of "comprehensive monetary easing, ensuring financial market stability, and providing support to strengthen the foundations of economic growth."

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