Japan's central bank leaves policy unchanged

By staff and wire reports

TOKYO, Japan -- The central Bank of Japan left monetary policy unchanged Thursday, despite industrial output falling in October to its lowest level in more than 13 years.

The Ministry of Economy, Trade and Industry said October industrial production fell by a seasonally adjusted 0.3 percent from a month earlier.

The BOJ decision was no surprise to financial markets, as the central bank has already pushed interest rates close to zero and flooded the money market with funds in a vain effort to prevent recession in the world's number two economy.

Japan almost certainly is in its fourth recession in a decade, with the most recent estimate by the OECD suggesting the economy will contract by 0.7 percent this year and a further 1 percent next year. The International Monetary Fund's similar forecast is for a 0.9 percent contraction this year and a 1.3 percent reduction in 2002.

Official gross domestic product (GDP) figures for the July-September quarter due out on December 7 look certain to confirm the economy has entered recession.

'Wait and see stance'

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"There are voices calling for more monetary easing, but I think the BOJ is taking a wait-and-see stance because the situation has not changed dramatically since they last eased and the government has just enacted a supplementary budget," Tomoyuki Ota, an economist at Fuji Research Institute, told Reuters news agency.

"In a sense, they need to keep the powder dry and leave some leeway in their options in case of an emergency situation."

Financial markets have focused recently on the possibility of the BOJ buying foreign bonds as part of its money market operations, although its top officials have publicly rejected the idea.

Advocates of such a policy believe it will help weaken the yen, bringing relief to Japanese exporters and contributing to the fight against deflation.

Economics Minister Heizo Takenaka said it would be useful for the central bank to consider such an option.

"As I have said before, there is a need to come up with new policy steps that go beyond the current framework. (Foreign bond buying) would come under that debate," he told a news conference after attending the BOJ's policy-setting meeting.

Downgrade for credit rating

With monetary policy nearing a limit and fiscal policy constrained by ballooning public debt -- which led to a downgrade in Japan's sovereign credit rating this week by Fitch IBCA and Standard & Poor's -- the grim industrial data cast a shadow over Prime Minister Junichiro Koizumi's reform efforts.

METI said in its industrial production report that output continued to decline. It said future movements required close monitoring as the inventory ratio remained high and worries persisted about final demand.

The index that measures the aggregate output level fell to its lowest level since March 1988. The October output was also down 11.9 percent year-on-year, the ninth straight month of year-on-year falls.

"The October output figure was better than our forecast but this isn't much of a bright sign for the economic outlook," Shinichi Sato, manager of market research at Tokyo-Mitsubishi Securities, told Reuters.

Earlier on Thursday, Jiji news agency reported that Japan's unemployment rate rose to a record 5.4 percent in October from 5.3 percent in September. The Ministry of Public Management, Home Affairs, Post and Telecommunications will release the official figures on Friday.

Reuters contributed to this report.