BOJ holds fire, unfazed by recession and 1st quarter


By Leika Kihara

TOKYO (Reuters) - The Bank of Japan kept monetary policy steady on Friday in a sign that a first-quarter economic slump did not change the central bank's view that growth will pick up around autumn when the wounds from the devastating earthquake begin to heal.

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In a surprise move, Deputy Governor Kiyohiko Nishimura dropped his proposal to loosen policy further with an expansion of the central bank's asset-buying scheme. He made such a proposal last month but was voted down by an 8-to-1 margin.

That has led some analysts to scale back expectations of a near-term monetary easing.

"I don't see a lot of substantive steps the BOJ could take, because with asset purchases you're talking about bringing the yield curve 4 to 5 basis points lower, which is marginal."

As widely expected, the BOJ kept interest rates unchanged at a range of zero to 0.1 percent by a unanimous vote and maintained the 10 trillion yen limit ($122 billion) for its asset buying scheme, which now serves as its main policy tool.

Government debt, stock and currency markets were broadly steady after the announcement and Kazuhiro Takahashi, manager at Daiwa Securities said the yen's recent stability may have persuaded Nishimura to change tack.

The central bank maintained its assessment of the economy, saying it faced strong downward pressure due to the impact of the March 11 magnitude 9.0 earthquake, a deadly tsunami and a crisis at a crippled nuclear plant.

It also repeated that it will focus on risks to growth, signaling that it stands ready to ease monetary policy further if the damage to the economy proves bigger than expected.

The world's third largest economy shrank much more than expected in the first quarter and stumbled into its second recession in three years after the disaster hit business and consumer spending and tore apart manufacturers' supply networks.

However, the BOJ sees the current downturn as a temporary rough patch, a view shared by Economics Minister Kaoru Yosano, and focuses more on whether the economy will resume growth late this year as it projects.

That means that the BOJ will wait for more clues on the timing of the recovery, and use its limited policy options only if a sudden market shock or prolonged disruptions to output hurt sentiment and spending.


The BOJ has repeatedly argued that while monetary policy can mitigate a sharp deterioration in sentiment, there is little it can do to address problems now plaguing the economy such as fears of power shortages and supply chain disruptions.

Still, the BOJ is expected to maintain its ultra-loose policy bias for at least another year even as other central banks, such as the Federal Reserve and the European Central Bank, start to roll back huge stimulus activated after the collapse of Lehman Brothers late in 2008.

Given risks to recovery, such as a threat of power shortages during the summer, BOJ Governor Masaaki Shirakawa, due to brief the media after 0700 GMT (3 a.m. EDT), is expected to stress the bank's readiness to ease policy further if Japan struggles to return to growth when he elaborates on the decision later in the day.

Any further easing would come through topping up of the BOJ's pool of funds set aside for purchases of a range of financial assets including government bonds and corporate debt, which the central bank doubled days after the quake.

It bank has held monetary policy on hold since then and has so far purchased nearly 4 trillion yen worth of assets.

"The BOJ probably needs to go through more data for April and May to decide if it needs to revise its view on the economy," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"There is a chance the BOJ will expand its asset buying scheme around August, when the government is reportedly to compile the next sizable extra budget for the disaster."

(Additional reporting by Rie Ishiguro, Kaori Kaneko, Stanley White and Antoni Slodkowski; Editing by Tomasz Janowski)