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Last Updated: Wednesday, 8 March 2006, 07:35 GMT
Bank of Japan meets on deflation
Bank of Japan Governor Toshihiko Fukui
Markets will be listening for clues from the BOJ's boss Mr Fukui
The Bank of Japan has started a two-day meeting to discuss ending its policy of almost zero interest rates, which was put in place to combat falling prices.

Japan's economy, the second largest in the world, has been dogged by deflation for the best part of a decade.

However, recent figures have shown that the economy is improving and steady price growth may have returned.

The Bank of Japan is worried that cheap credit at a time of improving growth may create a property and asset bubble.

No return

Japan's government has urged caution, warning that it was still too early to say that the spectre of deflation had been banished for good.

Prime Minister Junichiro Koizumi said earlier this week that the central bank "must not allow deflation to return".

Interest rates were slashed to zero almost five years ago, and the central bank has been pumping extra cash into the economy in an effort to halt deflation.

While there is a chance of an interest rate rise in April, most investors will be watching the Bank of Japan's statement after the meeting ends for any clues as to future policy.

"The market has already priced in an imminent move," said Takahide Kiuchi, a senior economist at Nomura Securities.

How the changes might impact the Japanese economy

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