Bank of Japan Holds Rates Steady,

Bank of Japan Holds Rates Steady,
Offers Grim Economic Outlook
TOKYO -- The Bank of Japan held interest rates steady Tuesday but downgraded its assessment of the domestic economy, describing it as "sluggish" for the first time in 10 years.

Together with a recent economic downgrade by the government, the BOJ's revision suggests Japan has entered a recession. That means the country's policy interest rate, which the BOJ board voted unanimously Tuesday to keep at 0.5%, is likely to remain accommodative for the foreseeable future.

BOJ governor Masaaki Shirakawa said Japan isn't likely to suffer a deep downturn, but it is unclear when the economy will get back on the recovery track given lingering weakness around the globe.

In a statement released with its interest-rate decision, the central bank downgraded its view on the economy to reflect a string of recent weak data. Japan's gross domestic product, for example, shrank by an annualized 2.4% in the April-June period, officials said last week.

The BOJ statement cited "high energy and materials prices and weaker growth in exports" as key factors in the downturn.

It was the first time since May 1998, when Japan was suffering through a recession caused by a major banking crisis, that the BOJ has called the economy "sluggish."

"The timing of an economic recovery is likely to be delayed slightly longer than initially expected," Mr. Shirakawa said at a news conference following the board meeting. Mr. Shirakawa said it remains to be seen whether crude oil prices will keep falling and concerns over the U.S. economy and financial markets will fade. Still, he said "the possibility of a serious downtown in the near future is likely small."

The government this month also cut its view of the economy to "weakening." Yet despite the mounting evidence that the domestic and global economies have entered a downturn, Mr. Shirakawa said the BOJ still places equal weight on downside risks to the economy and upside risks to prices.

In the statement accompanying its rate decision, the policy board said inflation, as measured by the consumer price index, could move above the current 2% -- already its highest level since the early 1990s -- in the coming months, but should "moderate gradually thereafter."

"Thus it is likely that the economy will return onto a sustainable growth path with price stability," the statement said.