Bank of Japan Raises Economic Assessment, Leaves Key Interest Rate Near 0%

The Bank of Japan raised its economic assessment for a second month after companies ramped up production at the fastest pace in more than 50 years.

Governor Masaaki Shirakawa and his policy board left the benchmark lending rate between zero and 0.1 percent at a meeting in Tokyo today, the central bank said in a statement. They also kept unchanged a 10 trillion yen ($125 billion) fund to buy assets such as corporate bonds and exchange-traded funds.

Automakers from Toyota Motor Corp. to Honda Motor Co. are restoring facilities and hiring workers to make up for lost output from the March 11 temblor, and companies expect profits to surge 21 percent in the second half of the year. Increased optimism about the rebound fueled gains in the Nikkei 225 (NKY) Stock Average last month, making it the world’s best performing developed market benchmark index.

“The BOJ is confident because supply-chain constraints are easing faster than expected,” said Junko Nishioka, chief economist at RBS Securities in Tokyo and a former central bank official. “They haven’t been factoring in risks like Europe’s debt crisis, which has been making markets volatile, so they may need to alter their stance if more negative factors emerge.”

Stocks slid 1.4 percent to 9,925.92 on concern Europe’s debt crisis would spread, weakening earnings prospects exporters. The yen, which has appreciated more than 4 percent against the dollar in the past three months, traded at 79.80.

Risks to Outlook

The central bank today said developments in the U.S. and European economies were among risks for the outlook. The Bank of Japan is expected to keep its benchmark interest rate unchanged until at least mid-2013, according to 11 of 14 economists surveyed by Bloomberg News.

The BOJ cut its growth forecast for the year ending March 2012 to 0.4 percent from an April estimate of 0.6 percent. It kept its predictions for a 2.9 percent expansion in the following year and inflation of 0.7 percent for both fiscal 2011 and fiscal 2012, according to today’s statement.

“Japan’s economic activity is picking up with an easing of the supply-side constraints caused by the earthquake disaster,” the central bank said in a statement. Increasing output has resulted in an “upturn” in exports, and household and business sentiment has improved, it said.

Toyota and Honda said last month they plan to add thousands of workers in Japan as they increase production. Toyota, the world’s largest automaker, said domestic plants were running at 90 percent of planned levels in June, up from 50 percent in April and May, when output was depressed by a shortage of parts from suppliers.

Spending Rebound

Manufacturers see business prospects improving later this year and plan to spend more on plant and equipment while also stepping up hiring of workers, the central bank’s Tankan survey showed. Conditions for service providers have also been improving. Retail sales fell at the slowest pace in May since the disaster and wages rose for the first time since the temblor.

Economists said recent signs of a slowdown in the U.S., Japan’s second-largest export destination, and increased electricity constraints at home in the aftermath of a nuclear accident in Fukushima may cloud the outlook. The U.S. unemployment rate rose to 9.2 percent in June, the highest this year, as payrolls grew at the slowest pace in nine months.

Nuclear Plants Shut

Japan’s government yesterday pledged to keep all nuclear reactors halted by the accident idle until it completes safety tests. Almost two-thirds of the nation’s 54 reactors have been shut by the earthquake or taken offline because of regular checks.

Shirakawa said today he was “very concerned” about power shortages prompting companies to move factories overseas, lowering the nation’s growth potential.

“Japan’s medium-term growth prospects have stagnated since the earthquake,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. “Lack of clarity over when the nuclear reactors will be re-started and the electricity supply constraints related to that have increased uncertainty and may prompt manufacturers to shift production overseas.”

Prime Minister Naoto Kan has proposed a 2 trillion yen second extra budget for rebuilding after the quake. The disaster has left more than 22,000 people dead or missing, and the government estimates it caused 16.9 trillion yen in damage.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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