Bank of Japan defers rate action

Retail spending fell in March but ministers say demand is still solid

Japan has kept its key interest rate on hold at 0.5% amid fresh concerns about deflationary pressures in the economy.

The Bank of Japan deferred any action at its monthly meeting amid signs that the steady recovery in the Japanese economy might be under strain.

Figures released on Friday showed a fall in industrial output last month while consumer prices also declined.

The Bank of Japan has said it wants to see rates rise gradually but is under political pressure not to go too far.

'Pretty weak'

The 0.3% fall in core consumer prices last month has raised fresh concerns that Japan's long-standing battle with deflation may not yet have been won.

The monthly drop - largely due to falling energy prices - was the second in a row.

Today's data does not change my view that as a whole Japan's economy is recovering steadily Koji Omi, Japanese finance minister

Industrial production fell by a larger-than-expected 0.6% on a monthly basis and is down 1.4% over the first quarter.

"It is pretty weak data and combined with shipment and inventory data, it is very, very weak," remarked Takehiro Sato, a senior economist with Morgan Stanley.

But ministers pointed to the fact that consumer spending remains solid while unemployment is at an eight and a half year low.

"Today's data does not change my view that as a whole Japan's economy is recovering steadily," said finance minister Koji Omi.

Japan kept interest rates at 0% for many years in an effort to combat deflation but raised them to 0.25% last year following signs of a pick-up in the economy. Rates were raised to 0.5% in February.