Japan: Central bank sits tight

The Bank of Japan holds its next policy board meeting on Monday -- and the gloomy outlook makes higher interest rates very unlikely.

Business sentiment among large Japanese manufacturers has fallen to the lowest level in nearly five years as executives fret over rising energy and raw material costs, as well as sluggish demand at home and abroad. Gallup polls also show Japanese consumer pessimism increased sharply from 45% in August 2007 to 66% in March 2008. Average monthly spending by households was down 3.2% in real terms year-on-year in May, the government's Statistics Bureau reported. The pessimism appears warranted: cost-pushed inflation has reached a decade high, wages have grown at their slowest pace in five months, and the number of jobs available has hit a three-year low. Economists are anticipating that the country's economy will continue to slow or possibly contract in coming months. Accordingly, the central bank may wait another year before it can confirm the length and the depth of a recession in Japan and resume interest rate adjustments.

Exports have held up well this year, but will struggle as the economic reverberations of slowing economies in the United States and Europe start to be felt in markets on which Japan has been able to rely in recent months, for example, in Asia. The risk is rising that the economy could start moving towards a mild recession later this year.