Sluggish bank lending and output data on Wednesday underscored concerns about the outlook for Japan's economic recovery, a view shared by the Bank of Japan, which kept its ultra-loose monetary policy unchanged. The BOJ's board voted unanimously to leave the central bank's target for excess liquidity in the banking system at current levels, continuing the so-called "quantitative easing" policy that has kept interest rates near zero for more than three years. The BOJ, in a monthly report released after the policy announcement, said Japan's economic recovery was continuing, but expressed concern about high oil prices. Japan, which imports virtually all of its oil, is also vulnerable to any slowdown caused by higher energy prices in the United States, its biggest export market.
"Future movements in crude oil prices are uncertain," BOJ Governor Toshihiko Fukui told a news conference. "We must closely watch their impact on the economy and prices." U.S. crude oil prices hit a record high above $54 a barrel on Tuesday but eased a bit on Wednesday. Analysts expect the BOJ to keep its easy monetary policy in place for another or two as the economic activity remains spotty, fund demand stays slack and deflationary pressures persist. "If you look at the bank lending figures, you can't really say that money supply is growing as a result of a pickup in economic activity and credit creation," said Nobuhiko Kuramochi, senior economist at Shinko Research Institute. Bank lending was down 2.8 percent from the same month a year earlier at 449.0992 trillion yen ($4.1 trillion). It has fallen every month since comparable data began 45 months earlier, and the drop compared with falls of 2.8 percent in August and 3.4 percent in July.
"The drop in bank lending had been shrinking but over the past few months it has stopped narrowing further, indicating that lending still lacks momentum to grow strongly," said Chotaro Morita, a strategist at Deutsche Securities. Separately, the government said industrial production for August was revised to a rise of 0.1 percent from July. Preliminary data showed a rise of 0.3 percent. Money supply, as measured by M2 plus certificates of deposit, rose 2.1 percent in September from a year earlier. The increase was the biggest since December 2002 but still fairly weak from a historical standpoint.
MAINTAIN POLICY
The BOJ has vowed to maintain its easy policy stance until consumer prices begin a sustained rise -- something most economists do not expect to happen for another year or two. For now, the central bank left its target for private-sector banks' current account deposits at the central bank at 30-35 trillion yen ($274-319 billion), where it has been since January. Any amount beyond the legally required reserves of about five trillion yen is excess liquidity that banks would, under normal circumstances, be inclined to draw down to make fresh lending. Fukui said on Wednesday that consumer prices in Japan will continue to fall slightly, but the decline will be more due to better productivity than an expanding output gap. "CPI will likely continue falling slightly from year-ago levels, but the reasons behind the fall have changed," he said. "There is no worry now that Japan will fall into a deflationary spiral." Markets barely moved on the BOJ announcement. The Nikkei share average <.N225> ended the day down 0.05 percent higher on the day and bond yields mildly higher. Separate data also showed that the surplus in Japan's current account, the broadest measure of trade in goods and services, rose from year-ago levels at its slowest pace in 14 months in August, adding to worries that the country's export-driven economic recovery was losing steam. Finance Ministry data showed the current account surplus was up 2.3 percent in August from a year earlier at 1.4470 trillion yen ($13.20 billion). It was higher than the median forecast of 1.1 trillion yen in a poll last week, but the rise was the lowest since June 2003, when the balance fell 23.0 percent.
"There is no question that the core components of the current account surplus are on a declining trend," said Yoshimasa Maruyama, a senior economist at Mizuho Research Institute. "The contribution of net exports to gross domestic product will likely be negative for the July-September quarter. "This is in line with concerns out there that a slowing global economy is dampening Japan's recovery." A hefty 17.5 percent rise in the income balance made up for the fall in the trade surplus. A ministry official said the rise was due to an interest payment on U.S. Treasuries at the end of August, which had last year been postponed to the following month because the last day of August fell on a Sunday. The trade surplus was down 15.3 percent from a year earlier at 806.3 billion yen. Exports were up 11.4 percent at 4.5694 trillion yen, but imports were up a faster 19.4 percent at 3.7631 trillion yen, boosted by a surge in oil prices. On a seasonally adjusted basis, the current account surplus rose 25.0 percent in August from the previous month. ($1=109.64 yen)////