Japan keeps interest rate on hold

The Japanese economy is slowing

Japan's central bank has left interest rates on hold as nervousness about the country's slowing economy grows.

The Bank of Japan voted to keep the benchmark rate at 0.5% - the same level it has been at since February 2007.

It said that high energy and materials prices and weaker growth in exports had left Japan's economy - the world's second largest - "sluggish".

But the central bank chief said that it was not heading for the kind of slump seen in the 1990s.

The economy was in better fundamental shape now than in the past, when Japan had too large a workforce and capacity for production, Masaaki Shirakawa said.

"There is little risk of the economy falling into a major downturn," he added.

The central bank forecast that inflation - already at its highest level in more than 15 years - was set to accelerate.

And Japan's heavy dependence on exports means it is vulnerable to the slowdown in the US and in Europe.

Last week, the government said the economy had shrunk for the first time in a year during the second quarter - with GDP declining 0.6% between April and June