The Bank of Japan left interest rates on hold at 0.5 per cent today as expected but downgraded its forecasts, warning high energy costs are slowing growth in the world's second-largest economy.
In a surprise move, the BOJ commented on the state of the economy and revised its growth and price forecasts in its rate decision statement.
"Economic growth is slowing further, reflecting weaker growth in business fixed-investment and private consumption against the backdrop of high energy and materials prices," the BOJ said in the statement.
"With regard to risk factors, global financial markets remain unstable and there are downside risks to the US and the world economy," it said.
But it said global inflationary pressure was increasing, a sign that it faces a tough balancing act between rising prices and slowing growth.
After robust growth in the first three months of this year, economists expect Japan's economy to have contracted slightly in April-June. They say the outlook remains shaky in the coming months if exports - a major driver of Japan's growth - sputter on slower global economic growth.
The rising cost of oil and food has been blamed for the slowdown but the BOJ has said it was more concerned about economic downside risks than accelerating inflation for now.
The BOJ lowered its growth forecast for the fiscal year to next March to 1.2 per cent, compared with 1.5 per cent projected in its twice-yearly outlook report in April.
It now sees 1.5 per cent growth in fiscal 2009/10, compared with a forecast made in April of 1.7 per cent expansion.
But such downward revisions did not change the market's view that the BOJ will stand pat on monetary policy for a while. With interest rates already low at 0.5 per cent, market players expect the next rate move to be a hike.
Reuters