Japan central bank keeps interest rates unchanged

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Japan's central bank kept a key interest rate unchanged at 0.5 percent Wednesday, as widely expected, amid growing concerns about financial market turmoil on Wall Street, slowing domestic growth and rising inflation.

In its post-meeting statement, the bank stuck with its description of economic growth as "sluggish against the backdrop of high energy and materials prices and weaker growth in exports."

It also noted that the current core inflation rate — about 2.5 percent — is at its highest since the early 1990s.

The bank, however, maintained its view that Japan's economy "will return onto a sustainable growth path with price stability."

Economists and market observers were awaiting comments later Wednesday by Bank of Japan Gov. Masaaki Shirakawa in the wake of the upheaval Wall Street, including the bankruptcy of U.S. investment bank Lehman Brothers, that has rattled global markets.

Despite various downside risks facing Japan, the central bank is unlikely to cut rates until faced with serious economic deterioration, said Masaaki Kanno, chief economist at JP Morgan Securities in Tokyo.

"Indeed, while the first round effect from Lehman's failure on the economy and the financial markets is limited in Japan, the risk of the larger-than-expected second round effect through a global recession and global financial turmoil is growing," Kanno said in a research memo.

"If the risk materializes, Japanese exporters will be damaged with substantial yen appreciation and a fall in export volumes," he said.

Overnight, the Federal Reserve kept its monetary policy on hold, saying that strains in financial markets have "increased significantly" but that it would keep an eye on them and act, if needed.

Earlier Wednesday, the Bank of Japan injected an extra 3 trillion yen (US$28.4 billion) into money markets to ensure liquidity. On Tuesday, it pumped in 2.5 trillion (US$24 billion), joining the U.S. Federal Reserve and other central banks in a global effort to shore up confidence.

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