Japan's central bank keeps interest rates on hold

Japan's central bank keeps key interest rate unchanged at already low 0.3 percent

TOKYO (AP) -- Japan's central bank kept its already low interest rates on hold Friday but warned of a prolonged economic slump at home and abroad.

The Bank of Japan last month cut its benchmark rate to 0.3 percent from 0.5 percent, so expectations for another rate reduction so soon were low. The October rate cut also left Japan, which has the lowest interest rates among major economies, with very little wiggle room to loosen policy in the future.Describing the economy as "increasingly sluggish," the central bank said it does not expect a recovery anytime soon.

Key economic data this week painted a grim outlook for the world's No. 2 economy, which slipped into a recession in the third quarter. Japanese exports in October suffered their biggest decline in seven years, leading the country to post a rare trade deficit.

Major manufacturers like Toyota Motor Corp. and Isuzu Motor Co., hit by waning global demand, have announced production cuts.

"If financial conditions, as reflected in lending attitudes of financial institutions and issuing conditions in the corporate bond and (commercial paper) markets, should increase in severity, pressures acting to depress economic activity from the financial side may become more marked," the central bank said in a statement.

The Organization for Economic Cooperation and Development says Japan's economy will shrink 0.1 percent next year, compared with a 0.9 percent contraction in the U.S. and a 0.5 percent pullback in Europe.

But most analysts expect the BOJ to stick to the status quo for the time being, especially after recent comments by Bank of Japan Gov. Masaaki Shirakawa suggested reluctance to return to a zero-rate policy.

Further interest rate cuts could cause banks to curtail lending and chill money markets, he said in a speech in Tokyo earlier this month.

The central bank "must consider carefully not only the positive effects of monetary easing, but also the possible adverse effects that might hamper the proper functioning of the market mechanism and impede the flow of funds," Shirakawa said.

Japan's benchmark rate stood at effectively zero from 2001 to 2006 under the central bank's "quantitative easing" policy, through which it flooded the financial system with liquidity to boost lending and growth.

The Bank of Japan said Friday that it would closely monitor economic developments and implement monetary policy "appropriately."

It also pledged to provide ample funds in the money market, particularly over the year-end and fiscal year-end, and carry out purchases of commercial paper under repurchase agreements "more flexibly to facilitate corporate financing."