BOJ sees signs of recovery
Japan's central bank struck a more positive note on the economy at the beginning of April, suggesting it was in no rush to ease monetary policy further and pushing government bond futures to their lowest level in five months07/04/2010
"There are some signs of a sustained recovery in Japan's economy ahead," Bank of Japan Governor Masaaki Shirakawa told a news conference after a BOJ board meeting.
"The economy is moving in a better direction than in January."
Shirakawa said the chance of the world's second-largest economy suffering a double-dip recession had become quite small due to steady improvements in corporate profits and an expected increase in capital spending.
While the central bank's focus on risks posed by deflation leaves the door open for further monetary easing, analysts said his upbeat tone had reduced the chance of another such move in the near term.
"The signs of recovery are hard to ignore. I am surprised that he's claiming a sustainable recovery, though," said Adrian Foster, head of financial markets research at Rabobank International in Hong Kong.
"The message on unconventional measures is 'Don't push us into taking more'," Foster said, referring to incessant government pressure on the central bank in recent months to do more to combat deflation.
June Japanese government bond (JGB) futures fell as low as 138.00, their lowest in about five months, as Shirakawa's comments appeared to pour cold water on the likelihood of more policy easing. The 10-year Japanese government bond yield rose one basis point to 1.405 percent to a five-month high.
Earlier, in a widely expected move, the BOJ kept its policy rate unchanged at 0.1 percent and held off on any new policy initiatives, stressing that it will maintain very loose monetary policy to achieve its top priority of pulling Japan out of deflation.
The BOJ has been virtually alone among the world's major central banks in continuing to expand monetary easing as the economy remained stubbornly weak and deflation worsened.
The US Federal Reserve Bank and the European Central Bank have been gradually unwinding emergency lending measures put in place during the global financial crisis, and many of the BOJ's peers in Asia are already raising rates or preparing to so do this year as their economies recover at a far stronger pace.
After a drumbeat of government pressure, the BOJ in March further eased monetary policy by doubling the size of its fund-supply tool adopted in December, at which it offers loans to commercial banks at the policy rate of 0.1 percent.
Despite improvements in exports, domestic demand has been lacklustre, prompting many analysts to believe the BOJ would ease policy further in the coming months as the government pressed it for further steps to support growth.
Some analysts now believe otherwise.
"I think Shirakawa has moved forward his economic assessment considerably. He seems more convinced about a recovery in the economy," said Takeo Okuhara, a fund manager at Daiwa SB Investments in Tokyo.
"Shirakawa wouldn't admit it but the fact that the yen has been weakening would be making the BOJ a lot more comfortable. I think the chances of further easing are very slim."
The yen has weakened four percent against the US dollar since the last BOJ policy decision on March 17.
In a statement announcing its rate decision, the BOJ sounded slightly more optimistic about the economy than in the previous month, tweaking its assessment to say the economy "continued" to pick up and citing improvements in overseas economies among factors supporting growth.
It also noted improving business sentiment after last week's tankan survey showed big firms were far less pessimistic about conditions than three months before.
Japan's economy pulled out of recession nearly a year ago thanks to a combination of stimulus spending and monetary loosening, but it has struggled to gain traction.
With markets jittery about Japan's ballooning fiscal deficit and with interest rates near zero, the government and the BOJ are slowly running out of options even as persistent price falls threaten to derail a fragile recovery.
Japan's outstanding debts are already almost twice the size of its economy.
Saddled with heavy borrowing and struggling with sliding approval ratings ahead of a mid-year upper house election, the government is expected to continue leaning on the BOJ to support growth.
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