TOKYO (MNI) – The Bank of Japan on Friday upgraded its assessment
of the effects of its low interest rate policy on financial market
conditions and the economy.

“Financial conditions have continued to show signs of easing,” the
BOJ said in its latest economic report for July, deleting the phrase
“with some lingering severity” from the description given last month.

In June, the BOJ said, “Financial conditions, with some lingering
severity, have continued to show signs of easing.”

The BOJ had used the “severity” phrase since December 2008.

“While the stimulative effects from low interest rates are still
partly constrained in light of economic activity and prices, such
effects are beginning to increase in light of corporate profits,” the
BOJ report also said.

This, too, was an upgrade compared from the assessment in June,
when the BOJ said: “With economic activity and corporate profits at
current levels, the stimulus effects from low interest rates are still
partly constrained, but the degree of constraint has decreased mainly
due to the improvement in corporate profits.”

BOJ Governor Massaki Shirakawa said at his press conference
Thursday that the effects of the central bank’s accommodative policy are
intensifying. The BOJ raised its forecast for economic growth this
fiscal year to 2.6% from the 1.8% it projected in April.

The BOJ’s latest Tankan corporate sentiment survey released on July
1 showed both financial positions among borrowers and the lending
attitude among financial institutions improved for the fifth straight
quarter.

In addition, the Tankan showed that all sectors expect their
profits to turn positive this fiscal year, the first rise in three years
for major firms and the first increase in four years for small
businesses.

In July economic report, the BOJ left its overall economic view and
outlook for Japan’s economy unchanged from the previous month.

“Japan’s economy shows further signs of a moderate recovery,
induced by improvement in overseas economic conditions,” the BOJ said
for the third consecutive month.

Looking ahead, the BOJ repeated its view from last month that the
economy is “likely to be on a recovery track.”

The report also left unchanged the central bank’s assessment of
major economic components, such as capital spending, exports and
personal spending.

“Business fixed investment is showing signs of picking up,” the
latest report repeated.

The assessment of consumer spending was changed slightly,
indicating that spending was relying less on support from government
policy measures as the effects of those measures begin to fade.

“Private consumption has been generally picking up,” the BOJ said
in this month’s report. In June, the BOJ said, “Private consumption,
notably durable goods consumption, is picking up party due to policy
measures.”

Still, the BOJ remained cautious about the outlook for
consumer spending.

“Domestic private demand is expected to continue improving, but the
pace of improvement is likely to remain moderate for the time being,
amid the persistent sense among firms of excessive capital stock and
employment as well as the waning effects of policy measures.”

This sentence was modified slightly from the previous month to
make note of the reducing in the effect of government stimulus support
for ecologically friendly products.

In June, the BOJ said: “Domestic private demand is expected to
remain moderate for the time being amid the strong sense among firms of
excessive capital stocks and employment.”

Despite recent weak consumer spending data, the BOJ maintained its
view that the uptrend remains intact, given that sentiment data has
remained firm.

Japan’s real average household spending fell 0.7% from a year
earlier in May, as spending on furniture and household utensils,
education, clothing and footwear, and medical care decreased.

It was the second consecutive year-on-year drop in inflation
adjusted terms following a 0.7% fall in April.

But Japan’s Consumer Confidence Survey index posted its sixth
consecutive monthly gain in June, rising to 43.5 — a three-year high —
from 42.8 in May as fears of job and wage cuts continued to ease.

All the sub-indexes improved in June and the headline index hit the
highest level since September 2007, when it stood at 44.1.

The BOJ repeated: “The employment and income situation has remained
severe, but the degree of severity has eased somewhat.”

The BOJ also left unchanged its assessment of consumer prices: “The
year-on-year pace of decline in consumer prices is expected to slow as
the trend in the aggregate supply and demand balance improves
gradually.”

The BOJ also repeated its outlook for exports and production: “The
uptrend in exports and production is expected to continue, reflecting
continued improvement in overseas economic conditions, although the pace
of increase is likely to moderate gradually.”

After a two-day policy-setting meeting on Thursday, the BOJ said
that its policy board voted unanimously to maintain the target for the
overnight lending rate among commercial banks at 0.1%, the lowest
possible level without hurting market functions.

The BOJ has maintained the target at 0.1% since December 2008, when
it lowered it from 0.3% at the height of the global financial crisis.

tokyo@marketnews.com
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