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The Globe and Mail

Bank of Japan stands pat, cuts economic view as recession risk looms

Japan's Economics Minister Seiji Maehara made a rare appearance at the Bank of Japan’s meeting Oct. 5 to appeal for more dramatic action to spur growth.


The Bank of Japan kept monetary policy steady on Friday despite mounting political pressure for action as sagging exports to China and Europe heighten the chance of a recession, preferring to hold fire now to assess the effect of last month's stimulus.

But the central bank warned of strong uncertainty over the global outlook and used bleaker language to describe the state of Japan's economy, keeping alive market expectations that it may ease at its next policy-setting meeting on Oct. 30.

The decision came amid heightening pressure from the government, with newly appointed Economics Minister Seiji Maehara, a vocal advocate of bolder aggressive monetary expansion, making a rare appearance at Friday's meeting.

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"The government's view is that we want the BOJ to pursue strong monetary easing to reach the price goal it has set for itself," Mr. Maehara told reporters shortly before heading to the central bank's headquarters.

It was the first time in nearly a decade that an economics minister has attended a BOJ meeting.

As widely expected, the BOJ maintained its key policy rate in a range of zero to 0.1 per cent and held off on expanding its asset-buying and loan program, after having increased it just last month on fears that weak exports and output are diminishing prospects of a near-term recovery.

But it kept up its warning that the global economy was moving deeper into deceleration, hurting Japanese business sentiment and weakening exports and output.

"Japan's economic activity is more or less levelling off," the BOJ said in a statement announcing its policy decision. That was a grimmer tone than last month, when it said a pickup in growth was pausing.

Reflecting growing signs that the economy may slip into a recession, the BOJ is expected to cut its long-term economic and price forecasts due out at the Oct. 30 review, and admit that Japan remains years away from achieving its 1 per cent inflation target, say sources familiar with the central bank's thinking.

So far this year, Japan's economy has outperformed most of its peers in the Group of Seven on spending for rebuilding from last year's earthquake and tsunami. But with that effect fading, domestic demand may not make up for falling exports for too long.

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Output fell to a 15-month low in August on sagging sales to top export market China and business sentiment soured in the three months to September, fuelling concerns that the world's third-largest economy has stalled and may slip into recession.

BOJ officials have signalled their readiness to act again should the economy underperform despite September's easing, or if risks heighten enough to threaten Japan's recovery.

Governor Masaaki Shirakawa may reinforce that message in his post-meeting news conference and warn of risks to growth that may delay a clear end to deflation.

Two government representatives, one from the finance ministry and another from the Cabinet Office, which Mr. Maehara heads, can attend the BOJ's policy meetings. They cannot vote but may express views and propose a request in vote on policy.

Mr. Maehara did not propose a delay in the vote but his rare appearance shows mounting political pressure will keep the central bank on edge.

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