BoJ warns economy in severe state

Bank of Japan Governor Masaaki Shirakawa said the country's economy was in a very severe state due to damage from the March earthquake, signalling that the central bank was sticking to its ultra-loose monetary policy bias. Shirakawa repeated that the BoJ would do its utmost to beat deflation but added that any price rises needed to be driven by solid economic growth, emphasising the need for policies to boost Japan's potential growth.
"Deflation is a very serious problem. But the more serious problem is that Japan's economic strength is gradually declining," Shirakawa told a parliamentary committee meeting on Tuesday. Finance Minister Yoshihiko Noda told the same committee that beating deflation was a top priority for the government, even as it battles to contain the damage from the devastating earthquake.
Japan has been mired in deflation for much of the past decade but the fall in core consumer prices narrowed to a 0.1 percent year-on-year drop in March, due largely to a spike in commodity prices. The BoJ expects core consumer prices to rise 0.7 percent in both the current fiscal year from April and the following year, due largely to rising fuel and food costs. But it has said price rises alone will not prompt it to unwind its ultra-easy policy. The BoJ is expected to keep policy on hold this week but stress its readiness to ease further if the quake's damage to the economy proves bigger than expected.