Japan’s central bank has voted unanimously to keep interest rates on hold at 0.1%, as widely expected.
However, while the Bank was optimistic for the future, it noted the continued weakness in consumer spending, as well as a sharp fall in capital spending by companies.
Private consumption, which makes up for over half of the country’s gross domestic product, remains weak due to rising unemployment.
The Bank expects the economy to begin its recovery in the latter half of 2009.
In a statement, the Bank of Japan said: “Japan’s economic conditions have stopped worsening. Public investment is increasing and exports and production are picking up. Business sentiment, especially of large manufacturing firms, has stopped deteriorating.”
Meanwhile, the Bank has revised its forecast for the next financial year, predicting positive growth of 1.0%, revised from its earlier projection of 1.2%.
Earlier this week, the world’s no.2 economy received a boost with the news of a rise in Japanese consumer confidence in June.
The Government said Japan’s consumer sentiment index reached its highest level since December 2007 and represents the sixth consecutive monthly rise.
In the meantime, the Bank highlighted that industrial output and exports are now starting to improve, while efforts are underway to boost lending.
However, while the economy looks to the future, the fact remains that analysts fear there is a risk of deflation.
Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s.
A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.
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