The Bank of Japan held rates unchanged and cut its growth and inflation forecasts today, as it warned global uncertainties and financial market conditions could affect the Japanese economy.
The central bank said it now expected flat consumer prices in the year to next March but it also maintained it would gradually raise Japan's low interest rates to more normal levels based on improvements in the economy and price conditions.
The BOJ left its policy rate unchanged at 0.5 per cent today, as widely expected, just hours before the Federal Reserve is expected to cut US interest rates.
Analysts said the BOJ's comments, in a half-yearly outlook report, did not change expectations that Japan's central bank would hold off raising rates until early next year, while it watched to see if global credit and housing market problems derailed Japanese growth.
"There was no surprise in the downward revisions to forecasts, as they fell within expectations," said Junya Tanase, a forex strategist at JPMorgan Chase Bank.
"Market players continue to view that the BOJ's action is dependent on overseas developments."
Financial markets showed minimal reaction to the widely expected decision to hold rates, which was once again made by a vote of 8-1 with board member Atsushi Mizuno the sole dissenter.
Swap contracts on the overnight call rate are pricing in less than a 20 per cent chance of a BOJ rate rise by December, a 30 per cent possibility for January and about a 55 per cent chance for March, unchanged from before the decision and the outlook report.
In the outlook report, the BOJ cut its CPI inflation forecast for the year to March 2008 to 0.0 per cent from 0.1 per cent in the previous half-yearly report in April.
The central bank also said a soft landing in the US economy was still likely but added further problems in the housing sector there posed downside risks to the Japanese economy.