Bank of Japan Keeps Rates On Hold - 12 August 2010

By: Dr. Mike Campbell

Following the same pattern as the Bank of England and the ECB, the Bank of Japan has announced that it will leave its interest rate unchanged at just 0.1%. The rate has been at this level since December 2008. The reasons are the same as those given in Europe; cheap money should help to stimulate the economic recovery.

The Bank of Japan is also toying with the idea of injecting further money into the economy for the same reason. The Japanese economy continues to have to battle with deflationary pressure – falling prices – meaning that consumers delay making major expenditures as long as possible in the knowledge that the cost may be lower when they do buy. This stifles domestic demand.

Japan is beginning to feel the pinch from the high Yen which is making its exports more expensive in the markets of its trading partners. Ultimately, this is likely to harm Japan’s economic growth (which is already slowing), unless the trend reverses.

Pessimism about the strength of the US economy is sending the Dollar lower against the Yen. It closed the European trading day at approximately 85.28 Yen to the Dollar – almost 20 Yen lower than the target value set by Prime Minister Kan when he held the finance portfolio.

Further woe for Japan may be coming in the shape of reduced Chinese demand for Japanese goods as a slowdown in China sets in (mind you, by most nation’s standards, Chinese demand remains buoyant). Manufacturing output in China was up 13.4% from July 2009, but the figure still represents the fifth consecutive month of falling output. China has removed some stimulus measures and closed inefficient factories and reduced bank lending in a bid to stop the economy from “over heating”.