By Mayumi Otsuma (China Daily)
Updated: 2007-09-20 07:26

The Bank of Japan kept interest rates unchanged after the economy shrank last quarter and the US Federal Reserve cut borrowing costs to avert a recession.

Governor Toshihiko Fukui and his policy-board colleagues left the key overnight lending rate at 0.5 percent, the bank said in a statement yesterday in Tokyo. The decision was by an 8-1 vote as Atsushi Mizuno, the only advocate for an increase in July and August, dissented again.

The Fed's acknowledgment that economic growth is in jeopardy has ramifications for Japan because the United States is the country's biggest export market. Fukui must also contend with the risk that Prime Minister Shinzo Abe's resignation last week will make the government less able to spur growth and stamp out deflation.

"The Fed's decision and the uncertain political outlook at home are raising hurdles for the Bank of Japan," said Masuhisa Kobayashi, chief fixed-income strategist at Barclays Capital in Tokyo.

The yen traded at 115.84 per dollar at 3:54 pm in Tokyo from 115.92 before the announcement, which was expected by all 42 economists surveyed by Bloomberg News.

Lowest rate

Japan's short-term rate is the lowest among major economies. Fukui, whose five-year term ends in March, has said he plans to gradually raise borrowing costs to avoid inefficient investment and sustain growth over the long term.

Other central banks have kept borrowing costs unchanged this month as they assess whether the US subprime mortgage collapse will derail global economic growth.

The European Central Bank shelved a plan to raise rates on September 6, and the central banks of Australia and New Zealand also kept rates on hold.

The Bank of England last week extended emergency funding to Northern Rock Plc - the biggest bailout for a British bank in 30 years - and on Tuesday offered extra cash to money markets to boost confidence in the banking system.

Bloomberg News

(China Daily 09/20/2007 page16)