Japan's central bank warned Friday Asia's biggest economy may worsen, but it dampened hopes of further interest rate cuts to ease the recession, which has prompted more job cuts at carmakers.
The Bank of Japan left its key interest rate unchanged at 0.3 percent at a two-day meeting as expected, three weeks after reducing borrowing costs for the first time in seven years to tackle the recession.
Japan's real economy may deteriorate further if financial markets worsen, said Bank of Japan governor Masaaki Shirakawa.
But he repeated that cutting interest rates too much also posed a risk, dousing speculation about a possible further reduction in borrowing costs.
“With an extremely low level of interest rates, taking additional measures could create various problems from the point of view of securing a smooth functioning of financial markets,” Shirakawa said.
The BoJ said in a statement that the outlook for Japan's economy “remains highly uncertain and given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan's economic recovery to be satisfied.
“Economic activity has been increasingly sluggish due to the effects of earlier increases in energy and materials prices and the decrease in exports, and this situation will likely persist over the next several quarters,” it said.
Japan confirmed this week that it had entered a recession for the first time in seven years, dragged down by weak exports and lower business investment.
Last month the BoJ cut its key interest rate by 20 basis points, the first reduction since March 2001, when it introduced an unprecedented policy of almost free credit to try to pull the economy out of the deflationary doldrums.
Since the last meeting, exports appeared to have deteriorated, while the financial crisis has been pressuring Japanese markets, Shirakawa said.
Japanese exports fell at the fastest pace in almost seven years in October as Asian demand cooled, prompting companies to reduce costs.
Japanese carmakers plan further downsizing to cope with the financial crisis, with Toyota Motor cutting 3,000 temporary jobs and Honda Motor reducing its global production.
Toyota Motor Corp. plans to half its temporary workforce in Japan to cope with the deteriorating market conditions, a company spokesman said.
Honda Motor said it would cut its production this year by 79,000 vehicles from an earlier target to cope with falling sales.
Japanese automakers have expanded rapidly in recent years to meet brisk demand for their fuel-efficient cars, but they have not been immune to the global economic downturn, even if they are in much better shape than their US rivals.
“The challenges facing the global auto sector are unprecedented, reflecting structural changes that will likely change the landscape of the industry,” warned Tatsuya Mizuno, a director at Fitch Ratings.
