Bank of Japan Governor Toshihiko Fukui

The Bank of Japan today kept its key interest rate on hold after a fall business confidence fell and Thursday's cut in forecast economic growth.

Japan's government on Thursday cut its economic growth forecast after the introduction of stricter rules for issuing building permits caused housing starts to plunge in September to a four-decade low.

Governor Toshihiko Fukui and all his colleagues supported leaving the benchmark overnight lending rate at 0.5%, the bank said in a statement today in Tokyo.

The Bank of Japan today also lowered its assessment of the economy, saying the pace of growth will ``slow for the time being.''

Bank of Japan statement on the economy

Japan's economy is expanding moderately as a trend, although the pace of growth seems to be slowing mainly due to the drop in housing investment.

Exports and production have continued to increase. Business fixed investment has also continued to trend upward against the background of generally high corporate profits. Private consumption has been firm in a situation where household income has continued rising moderately. Meanwhile, public investment has been sluggish and housing investment has dropped substantially. Under these circumstances and with higher material costs, business sentiment has become somewhat cautious.

Japan's economy is expected to continue expanding moderately, although the pace of growth is likely to slow for the time being.

Exports are expected to continue rising against the background of the expansion of overseas economies as a whole. Business fixed investment and private consumption are likely to follow an uptrend against the background of high corporate profits and the moderate rise in household income. Housing investment is expected to recover gradually, although it is likely to remain sluggish for the time being. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to be on a downtrend.

On the price front, the three-month rate of change in domestic corporate goods prices has been positive, mainly due to the rise in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been around zero percent.

Domestic corporate goods prices are likely to continue increasing for the time being, primarily reflecting the rise in international commodity prices. The year-on-year rate of change in consumer prices is projected to follow a positive trend due to the rise in prices of petroleum products and food products in the short run and the positive output gap in the longer run.

As for the financial environment, the environment for corporate finance is accommodative. Credit demand in the private sector has been more or less flat. The issuing environment for CP and corporate bonds has been favorable as a whole, although issuance spreads on those issued by firms with low credit ratings have expanded slightly. Lending attitudes of private banks have continued to be accommodative. Under these circumstances, the amount outstanding of lending by private banks has been increasing moderately, and the amount outstanding of CP and corporate bonds issued has been above the previous year's level. Funding costs for firms have risen slightly.

Meanwhile, the year-on-year rate of change in the money stock is around 2 percent. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.5 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, the yen has depreciated against the U.S. dollar compared with last month, while long-term interest rates and stock prices have been around the same level as last month.