Originally created 06/16/04

Japan central bank keeps monetary policy steady

TOKYO -- Japan's central bank on Tuesday issued its most upbeat assessment of the nation's economy in a decade, saying growth was gathering steam due to a boost in employment from higher industrial production and corporate profits.

Earlier in the day, the Bank of Japan kept its monetary policy steady despite a recent sharp rise in Japanese government bond yields.

The central bank said it expects the economy to gather momentum, an assessment that dovetails with recent data.

"Japan's economy continues to recover, and the increases in production and corporate profits are exerting positive effects on employment," the bank said in its June report.

It was the bank's most optimistic assessment of the economy since asset prices collapsed in 1991, the report said. Falling land and stock prices stunted growth for more than a decade.

The country's rebound has boosted bond yields in recent months, threatening to choke off the recovery by increasing borrowing costs and slowing investment.

However, the bank's decision Tuesday to hold interest rates steady, widely expected by financial markets, indicated the bank does not view the recent rise in yields as a threat to the recovery or a reason to further loosen its already loose monetary policy.

Even so, a sudden and sustained rise in yields could dent growth because bond yields serve as a benchmark for other interest rates.

The yield on 10-year government bonds rose to 1.8550 percent Monday, the highest level since October 2000 and well above its yield of 1.4500 percent when the Bank of Japan held its last policy board meeting.

At the end of a two-day meeting, the Bank of Japan left its target for liquidity, or the amount of funds at the bank held by commercial banks, in a range of 30 trillion yen ($270.8 billion) to 35 trillion yen ($315.9 billion). It also left unchanged its monthly purchase of government bonds at 1.2 trillion yen ($10.8 billion).

The 10-year government bond price rose 0.45 to 98.34 points on Tuesday and its yield slipped to 1.7950 percent.

The central bank has kept short-term interest rates near zero and injected cash in the financial system to encourage banks and businesses to keep money circulating throughout the economy. The bank reiterated that it would act promptly to stem any market instability.

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