Zero interest rates back on agenda

Governor Masaru Hayami: "Pessimism seems to overwhelm Japan's economic outlook"

The Bank of Japan may readopt the controversial zero interest rate policy in an effort to boost the country's ailing economy, governor Masaru Hayami has said.

In a speech to journalists, Mr Hayami hinted that evidence that the country's economic recovery is failing may prompt the Bank to readopt a policy which saw the country operate with an interest rate of 0% for 18 months.

"To decide whether to take such steps, we would like to watch price and economic conditions for a while," Mr Hayami said.

The comments follow a series of data revealing that the economy, which in the autumn had looked set to begin recovering from its worst slump in 50 year, was hovering on the verge of recession.

The country has reported its first trade deficit in four years, and consumer demand is sliding, while unemployment is at its highest level since the Second World War.

"The economic recovery is slowing further and uncertainty over economic prospects is growing," Mr Hayami said. "Accordingly we are becoming increasingly cautious.

"At present pessimism seems to overwhelm Japan's economic outlook."

But he defended the Bank's decision last August to raise interest rates to 0.25%, the first increase in 10 years, a move critics say is implicated in the country's economic slowdown.

The Bank last month cut the headline rate back to 0.15%, as Tokyo stocks slid to a 15-year low.

"The reason the pace of recovery has slowed is not because of the end of the zero interest rate policy, but because of a sudden cooling in the US economy," Mr Hayami said.

Her also raised the prospect of allowing the country's currency to depreciate, in an effort to boost exports and restore the trade balance.

"Intervening in the markets and driving down the yen is another policy idea."

But the Bank would need to consider the downsides of depreciation, "such as higher import prices and the negative impact on Asian economies".