By Lisa Twaronite, MarketWatch
TOKYO (MarketWatch) -- The Bank of Japan upgraded its view of the nation's economy, while it unanimously left its overnight call-rate target at 0.1% as widely expected Friday -- the same day the government published a report that officially declared the economy is in deflation.
The central bank said financial conditions continue to show signs of improvement, exports and production are increasing and the decline in corporate capital outlays appears to be ending.
"Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although the momentum of self-sustaining recovery in domestic private demand remains weak," the bank said in a statement issued after its two-day policy meeting. In its previous assessment, it said the economy "has started to pick up."
Although economic downside risks have diminished somewhat, the bank said it will maintain its accommodative policies and provide steady support to help the economy recover.
The central bank said its baseline scenario "projects that the pace of improvement of the economy is likely to remain moderate" until around the middle of the fiscal year ending in March 2011. Most analysts expect the BOJ to maintain its extremely accommodative policy at least through the end of 2010.
Gold Rally Pauses On Dollar Gains
Gold's seemingly unstoppable rally paused Thursday due to dollar strength and lower equities. Key to future moves will be the dollar, because gold is being bought as a hedge against currency weakness and is benefiting from the carry trade.
The Japanese government said in its monthly economic report for November released Friday that weak domestic demand has pushed the country in to "a mild deflationary phase."
While the government's official deflation declaration was widely leaked to local media, some analysts said its timing could be linked to Japan's rising public debt. Debt as a percentage of annual gross domestic product is already around 200%, according to International Monetary Fund estimates -- putting it at about twice the size of the country's economy.
"The government has declared that Japan is in deflation even at the beginning of an economic recovery. We think the government's surprise declaration is less of a sudden change in its price outlook than a step toward loosening fiscal discipline," said Junko Nishioka, chief economist at RBS Securities in Tokyo, in emailed comments.
'Prices will keep falling'
Japanese government officials have recently stepped up calls for the central bank to do more to support the still-fragile economic recovery here, after the BOJ took steps toward normalizing policy at its last meeting.
Japan's deputy prime minister, Naoto Ka, said Friday that the central bank needed to keep using special liquidity-boosting measures to pull the country out of deflationary conditions.
But Gov. Masaaki Shirakawa said at a press conference after the announcement of the bank's decision that the government and the BOJ are on the same page.
"If you define deflation as continuous price declines then the BOJ's judgment on prices is the same as the government's, as the BOJ forecast that prices will keep falling" for several years in its report released in late October, Shirakawa said, according to Dow Jones Newswires.
The BOJ said in its half-yearly economic outlook report released last month that it expects the core consumer-price index, which excludes fresh food prices, to drop 1.5% in the fiscal year ending in March, a steeper slide than its July forecast for a 1.3% fall. Core CPI will likely slip 0.8% next fiscal year and 0.4% in the year after that, the bank's outlook report said.
Government data released Monday showed the nation's economy grew more than expected in the July-September quarter, benefiting from the effects of government stimulus.
In real terms -- adjusted for price changes -- gross domestic product rose 1.2% in the quarter from the April-June period, or 4.8% on an annualized basis. Economists had expected a 0.6% on-quarter increase and an annualized increase of 2.2% in the latest period. See full story on Japan GDP.
The BOJ last month said it will allow its temporary program to purchase corporate bonds and commercial paper expire at the end of December, as scheduled. It extended a low-interest loan program for banks by three months through the end of March, but said that program, too, would then be allowed to expire. See full story on Oct. 30 Bank of Japan decision.