UPDATE 3-Bank of Japan keeps rates steady in uncertain times
(For more stories on Japan's economy click [ID:nECONJP]) (Adds comments from BOJ chief Shirakawa)
TOKYO, May 20 (Reuters) - The Bank of Japan left interest rates unchanged at 0.5 percent on Tuesday, as expected, opting to take more time to determine when the fog will clear from the economy -- both in Japan and around the world.
BOJ Governor Masaaki Shirakawa said he was still putting the emphasis on the risks facing Japan, noting uncertainty over the global economy and soaring energy and raw material costs.
But the central bank has little room to move as Japanese interest rates are already very low, and its policy board voted unanimously to keep its key rate at 0.5 percent in its quickest rate decision in nearly three years.
"The economic slowdown is becoming more evident," Shirakawa told a news conference, pointing to slower growth in Japan's corporate profits and capital spending and a flat trend in industrial production, even though exports have remained firm.
Despite the world's second-largest economy posting solid growth in the January-March quarter, its capacity to generate income has been weakening as rising energy costs hurt terms of trade, Shirakawa said, adding that caution was needed on how that affects domestic demand.
Shirakawa, however, noted that the risk of inflation was rising worldwide, and many board members said at this week's meeting that it was necessary to watch how higher energy prices would affect Japanese prices.
At its last policy meeting about three weeks ago, the BOJ dropped a two-year bias towards raising rates and took a neutral stance on monetary policy, saying it was inappropriate to predetermine its policy direction given the high uncertainty.
Many market players expect the central bank to sit tight for some months before eventually raising rates, possibly around the end of this year or early next year, given the view that the worst of the credit market turmoil is over and that the Federal Reserve could raise U.S. rates later this year.
Izuru Kato, chief economist at Totan Research, pointed to Shirakawa's cautious tone but said: "The chance of a rate cut is really slim as interest rates are already low and the global economy is unlikely to slow as much as feared in February and March."
"At the same time, a rate hike is unlikely until later in 2009 as it takes time for U.S. housing markets and personal consumption to fully recover."
Swap contracts on the overnight call rate JPONIBOJ=TRDT show the market sees a 55 percent chance of a quarter-point rate hike by the year-end, up from 35 percent early last week.
SLOWDOWN SEEN AHEAD
The central bank reiterated its view that the economy was slowing in its monthly report, but it was more upbeat on housing, which slowed sharply after tighter building regulations were introduced last year.
Growth in Japan has so far held up better than economists had expected. Gross domestic product grew 0.8 percent in the first quarter, data showed last Friday, thanks to strong exports that have so far weathered a U.S downturn. Continued...
