TEXT-Bank of Japan statement on monetary policy

TOKYO, Oct 14 - The following is the text of the Bank of Japan statement following a policy review:

Statement on Monetary Policy

1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guidelines for money market operations for the intermeeting period:

The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.

Voting for the action: Mr. M. Shirakawa, Mr. H. Yamaguchi, Mr. K.G. Nishimura, Ms. M. Suda, Mr. A. Mizuno, Mr. T. Noda, Mr. S. Nakamura, and Mr. H. Kamezaki. Voting against the action: None.

2. Japan's economy has started to pick up. Public investment has been increasing, and exports and production have also been rising against a backdrop of progress in inventory adjustments both at home and abroad as well as a recovery in overseas economies, especially emerging economies. In these circumstances, business sentiment, especially at large manufacturing firms, is showing some improvement. The decline in business fixed investment, which mainly reflects weak corporate profits, has been moderating. Private consumption, while there have been some signs of a pick-up mainly attributable to the effects of various policy measures, remains generally weak amid the severe employment and income situation. Meanwhile, the financial environment, with some lingering severity, is increasingly showing signs of improvement. The year-on-year rate of decline in the CPI has accelerated mainly due to the prices of petroleum products, which are lower than their high levels a year ago, in addition to the substantial slack persisting in the economy as a whole.

3. The Bank's baseline scenario through fiscal 2010, in which expectations of medium-to-long-term growth are assumed to remain generally unchanged, projects that the economy will recover; this recovery will be supported partly by the positive effects of measures to stabilize the financial system and those of fiscal and monetary policy measures, as well as by a recovery in overseas economies and improvement in conditions on global financial markets. With regard to prices, the pace of decline in the CPI is expected to stabilize at around the current level of the year-on-year rate for the time being. Thereafter, assuming that medium to long term inflation expectations remain stable, the rate of decline in the CPI is likely to moderate as the effect of the changes in the prices of petroleum products abate. If these developments continue, there are prospects for Japan's economy to return to a sustainable growth path with price stability in the longer run. However, the outlook is attended by a significant level of uncertainty stemming mainly from developments in overseas economies and global financial markets.

4. While there are signs of a better-than-projected recovery in emerging economies, risks to the economy remain on the downside, stemming from future developments in the global financial and economic situation, as well as from changes in firms' medium- to long-term growth expectations. With regard to prices, there is a possibility that inflation will decline more than expected, if the downside risks to the economy materialize or medium- to long-term inflation expectations decline.

5. The Bank, paying attention for the time being to the downside risks to economic activity and prices, will continue to exert its utmost efforts as the central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability.