Roundup: Japan confident of economy recovery from standstill

Bank of Japan Governor Toshihiko Fukui on Wednesday indicated that Japan's economy is about to shake off current pause to a comprehensive recovery, expressing strong confidence in the nation's economic recovery.

Fukui made the comment after the central bank revised upward its assessment of the world's second-largest economy for the first time in four months, citing upbeat business confidence, rising capital spending and improving employment.

"The economy is in the process of emerging from the standstill, but we cannot say it is completely out of it yet," Fukui said at a news conference.

While voicing optimism over the economy, the BOJ's policy- setting panel earlier in the day left its ultra-easy monetary policy unchanged after a two-day meeting to combat persistent deflation and ensure a sustained recovery of the economy.

"Japan's economy continues to recover, albeit with adjustments in information technology-related sectors," the BOJ said in its report on recent economic and financial developments for July.

The July report compares with the June report, which says, " Japan's economy continues on a recovery trend, albeit with adjustments in IT-related sectors."

The July report says Japan's economy "is expected to continue to recover," with growth in domestic demand more than offsetting slowdowns in exports, notably to China.

The report envisages that Japan's economic recovery will now be based on expected growth of both domestic and foreign demand, altering a scenario that the recovery is mainly driven by projected increases in exports.

It also confirms the progress in inventory adjustments in IT- related sectors.

The report says developments in the Japanese economy have broadly been, and are expected to be, in line with a BOJ scenario that Japan's economic recovery is likely to gradually gather momentum from the middle of 2005.

The scenario, which the central bank presented in its biannual Outlook Report released in April, also says consumer prices in Japan are expected to post a year-on-year increase in fiscal 2006, indicating Japan is likely to overcome deflation in the year starting next April.

However, the report urged policymakers to continue paying close attention to developments in energy and materials prices, near- term courses of the US and Chinese economies and domestic demand, in steering the Japanese economy.

The upgrading of the economic assessment was propelled by a series of upbeat economic data including stronger-than-expected readings of the BOJ's influential Tankan survey, released on July 1.

The quarterly survey's business sentiment index for large manufacturers came to 18 in the three months to June, up from 14 in March and above the average market projection of 15. It marked the first improvement in three quarters, signaling growing momentum in Japan's economic recovery.

Earlier in the day, the BOJ's Policy Board decided in a majority vote to maintain the current monetary policy framework, continuing to pump cash into the financial system at the same level as a month ago.

The nine-member board voted seven to two to maintain its target for the outstanding balance of current account deposits held by private financial institutions at the central bank in a range of 30 trillion to 35 trillion yen (270 to 315 billion US dollars).

The BOJ said that should there be a risk of financial market instability, such as a surge in liquidity demand, it will provide more liquidity irrespective of the target.

When liquidity demand is exceptionally weak, there may be cases where the balance of current accounts falls short of the target, the central bank said.

In the face of diminishing demand by financial institutions for excess funds, the Policy Board decided at the May 20 meeting to allow the current account deposits to temporarily fall below its monetary policy target.

The BOJ then allowed the current account balance to fall below the liquidity target June 2 for the first time since it introduced the quantitative credit-easing policy in March 2001.

Although the balance again fell below the target the following day, it has stayed within the 30-35 trillion yen range.

Fukui reiterated the BOJ's commitment to the current policy framework, saying, "The BOJ will not change its current policy framework until year-on-year changes in the core consumer price index stabilize above zero."

Government data showed on July 1 that the consumer price index in Tokyo -- a leading indicator of nationwide price changes -- dropped 0.4 percent in June from a year ago for the 69th straight month of decline.

Fukui repeated the pledge to quell speculation that the BOJ may lower the liquidity target sometime this year following its decision to allow the current account balance to temporarily fall below the 30 trillion yen line.

Speculation about lowering the target, which would be seen as a step toward credit tightening, stems primarily from a sense of excess surplus in cash among financial institutions amid receding concerns over the health of Japan's financial system.

Under the quantitative easing policy, the BOJ floods the financial system with ample liquidity to anchor short-term interest rates near zero.

The BOJ uses the outstanding balance of the current account deposits held by private financial institutions at the central bank as a monetary adjustment target, rather than the overnight call money rate.

Source: Xinhua