Japan's central bank on Thursday raised its economic growth forecast while holding its key interest rate near zero to keep borrowing costs super low.
As widely expected, the Bank of Japan's eight-member policy board voted unanimously to leave the overnight call rate target at 0.1 percent. The Bank has not changed the rate since December 2008.
It described the world's second biggest economy as showing "further signs of a moderate recovery," fueled by high growth rates in emerging countries. Exports and production, particularly of high-tech goods, are expanding and translating to stronger corporate profits and business sentiment.
The labor market remains weak, "but the degree of severity has eased somewhat," the central bank said. Deflation also persists, though prices are falling at a slower pace.
"Growth prospects will likely be higher for fiscal 2010 mainly due to the acceleration of growth in emerging economies," it said in a statement.
The central bank now predicts real gross domestic product will expand 2.6 percent in the year through March 2010, up from its previous forecast of 1.8 percent.
The figure is slightly higher than the 2.4 percent growth forecast by the International Monetary Fund on Wednesday. Japan's economy, which grew 5 percent in the January-March quarter, will likely slow in the second half of the year, the IMF said in a report. It warned of looming risks, including global market turmoil, a possible slowdown in key economies such as China, and Japan's massive public debt.
While the IMF praised the Bank of Japan for recent measures to fight deflation and support growth -- such as a new program to encourage bank lending to innovative companies -- it said the policy board should "stand ready to take additional easing measures" if necessary.
After last weekend's national elections, the central bank may come under stronger political pressure to do just that. The ruling party lost its majority in the upper house, and Prime Minister Naoto Kan appears likely to forge an alliance with smaller parties clamoring for the Bank of Japan to do more to fight deflation.
Lower prices may boost individual purchasing power, but deflation is generally bad for an economy. It plagued Japan during its "Lost Decade" in the 1990s, hampering growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases.
The central bank pledged to keep monetary policy "extremely accommodative" for the time being.
"The Bank recognizes that Japan's economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability," it said.
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