Bank of Japan issues growth warning as it holds rates

Flooded Honda factory in Thailand Floods in Thailand have hurt production at Japanese carmakers operating in the country

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The Bank of Japan (BOJ) has warned that the country's economic growth may be hurt by the eurozone debt crisis, flooding in Thailand and a strong yen.

It said the euro crisis was stifling demand from Europe, while disruption to supply chains due to the Thai floods was affecting Japanese manufacturing.

The warning comes just days after Japan reported that its economy grew by 1.5% in the third quarter.

The BOJ left its key interest unchanged between zero and 0.1% to boost growth.

"Japan's economy continues to pick up but at a more moderate pace, mainly due to the effects of a slowdown in overseas economies," the central bank said in a statement.

Recovery bump

Start Quote

By downgrading its economic assessment, the BOJ indicated its vigilance to risks regarding overseas economies”

End Quote Yuichi Kodama Meiji Yasuda Life Insurance

Japan's economy has been trying to recover from the aftermath of the earthquake and tsunami that caused widespread damage earlier this year.

Its expansion in the July to September period came after three quarters of contraction.

However there are concerns that its recovery may be derailed in wake of global economic developments.

The fear is that the ongoing debt crisis in the eurozone may hurt consumer demand in the region and dent demand for Japanese goods. That is likely to have a big impact on growth in Japan's export-dependent economy.

At the same time, many Japanese manufacturers including carmakers Toyota and Honda have had to cut their global output due to supply chain disruptions caused by floods in Thailand.

Analysts said these factors were weighing heavily on the central bank's predictions despite a recent recovery in economic growth.

"By downgrading its economic assessment, the BOJ indicated its vigilance to risks regarding overseas economies, chiefly uncertainty over Europe's debt crisis and the effect of Thai floods," said Yuichi Kodama of Meiji Yasuda Life Insurance in Tokyo.

Yen trouble

To make matters worse, the Japanese currency has maintained its strength against the US dollar. It was trading close to 76.97 yen against the US dollar in Asian trade on Wednesday.

A strong currency does not bode well for Japanese exporters as it makes their goods more expensive to foreign buyers and also hurts their earnings when they repatriate profits from abroad.

Japanese authorities have intervened in the currency markets this year and also introduced other policy measures in a bid to weaken the yen.

Analysts said the central bank may take further action if there are big moves in the yen's value.

"It's hard to predict the timing of the next action as it solely depends on currency moves," Mr Kodama said.

"But the BOJ may ease early next year when the effects of last month's currency intervention and monetary easing will fade," he added.

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