TOKYO—Japan's central bank said Friday it would stop buying corporate debt in December, ending some of the emergency credit measures implemented earlier this year as it battled recession, plunging markets and a lending freeze.
After keeping its key interest rate unchanged at 0.1 percent as widely expected, the Bank of Japan also predicted a sluggish few years for the world's second biggest economy: tepid recovery and three straight years of deflation.
In its semiannual outlook report, the central bank forecast that prices would continue falling through March 2012. It estimates the core consumer price index will fall 1.5 percent this fiscal year through March 2010, retreat 0.8 percent next fiscal year and then lose 0.4 percent the year after.
The latest projections suggest that even as the Bank of Japan phases out unconventional tools, it is unlikely to shift its super-low interest rate strategy anytime soon. The interest rate decision Friday was unanimous amid weak domestic demand and falling prices.
Citing stabilization of financial markets, the central bank voted 7-1 to end its purchases of corporate bonds and commercial paper as scheduled. However, it extended a special low-interest loan program until the end of March and will continue accepting corporate debt as collateral until the end of 2010.
"Japan's financial environment, with some lingering severity, has been increasingly showing signs of improvement, particularly in the CP and corporate bond markets," the central bank said in a statement.
Indeed, the worst of the global financial crisis appears to have passed, with companies indicating that they no longer face a severe credit crunch.
But demand in Japan is lackluster and the job market remains weak, despite an emerging recovery in exports. Prices are falling as a result, with the nation's core consumer price index down 2.3 percent in September from the previous year.
Deflation, which plagued Japan during its so-called "lost decade" of the 1990s, can hamper growth by depressing company profits and causing consumers to postpone purchases. This can lead to production and wage cuts, as well as increase debt burdens.
"The bottom line of the BOJ's policy is that, while ending the unconventional measures which reflect the recovery of markets is a rather technical issue, the BOJ will maintain its 'low for long' policy," said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co.
The Bank of Japan so far is downplaying the deflation problem, saying it is unlikely to "induce downward pressure on economic activity."
The board slightly raised its economic forecasts and now estimates gross domestic product to contract 3.2 percent this fiscal year before expanding 1.2 percent next year and 2.1 percent in fiscal 2011.
