BOJ Predicts Growth to Slow in 2011, Keeps 0.1% Rate (bloomberg.com)

July 15 (Bloomberg) -- The Bank of Japan kept interest rates unchanged and predicted growth in the world’s second- largest economy will slow next year as fiscal stimulus evaporates worldwide and overseas demand loses steam.

Policy makers raised their growth forecast for the year ending March 2011 to 2.6 percent from 1.8 percent estimated in April, while cutting next year’s to 1.9 percent from 2 percent, the central bank said in a statement today in Tokyo. The board held the benchmark overnight lending rate at 0.1 percent.

“The upward revision of this fiscal year’s growth doesn’t necessarily mean the BOJ is becoming more confident about a self-sustaining recovery, given that downside risks from Europe and the U.S. are mounting,” Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo, said before the announcement. “It’s becoming more likely that the Japanese economy will slow or stagnate later this fiscal year.”

Prime Minister Naoto Kan, whose government lost its upper- house majority this week, may put pressure on the central bank as he seeks support from smaller parties wanting to end deflation. The International Monetary Fund said yesterday that the Bank of Japan could support the recovery and ease the decline in prices, including through purchasing a wider range of assets and expanding fund-supplying operations.

Recovery Path

Bank of Japan Governor Masaaki Shirakawa said the economy will stay on a recovery path even as a stronger yen hurts exporters in the short term. The central bank “had already expected the pace of the economic recovery to slow down in coming months” from the “rapid” rebound since late last year, he said at a news conference after the policy meeting.

Japan’s currency climbed 5.8 percent against the dollar over the past three months and gained 0.6 percent today to 87.95 at 5:22 p.m. in Tokyo. That’s stronger than the 92.90 average breakeven point estimated by exporters.

“Growth prospects will likely be higher for fiscal 2010 mainly due to acceleration of growth in emerging economies, but remain broadly unchanged for fiscal 2011,” the BOJ said.

Global investors have become increasingly concerned that the world recovery will falter as European governments cut budgets, U.S. unemployment stays above 9 percent and China cools. Growth in China, Japan’s biggest overseas market, slowed to 10.3 percent in the second quarter from 11.9 percent in the first three months, the government said in Beijing today.

Stock Slump

The Nikkei 225 Stock Average slid 1.1 percent today, extending its decline over the past three months to 14 percent.

“The BOJ probably isn’t inclined to a bullish economic view even though it upgraded this fiscal year’s growth forecast,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “With chronic deflation and the global crisis lingering, the central bank will have to keep its super- low interest-rate policy for a long time.”

Board members said consumer prices excluding fresh food will fall 0.4 percent this fiscal year, less than the 0.5 percent predicted in April. It maintained its projection for prices to rise 0.1 percent in the year starting April 2011.

Yamaha Motor Co., the world’s second-largest motorcycle maker, said yesterday that sales in North America and Europe may fall twice as much as forecast as the debt crisis damps demand.

Other companies are shrugging off the market turbulence as growth in Asia spurs exports. Fujifilm Holdings Corp. said today that it will spend 40 billion yen to expand output of protective film for liquid-crystal displays...

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