The Bank of Japan is scratching its head as monetary easing has failed to buoy the economy, with exports slowing due to the sovereign debt crisis in Europe and the strong yen.
On Dec. 21, the central bank downgraded its economic assessment for a second consecutive month, citing a slowdown in overseas economies and the yen's appreciation.
Still, the BOJ kept its virtually zero interest policy unchanged to continue to monitor the economic activity after a series of monetary-easing measures implemented this year.
BOJ Governor Masaaki Shirakawa acknowledged that monetary policy has been unable to lift the economy.
"We have eased monetary policy aggressively," he said at a news conference after the BOJ's Policy Board meeting on Dec. 21, the last one scheduled for this year. "Spending (by companies and households) has not increased, despite substantially expanding credit."
The BOJ raised the amount of the fund for buying government bonds, corporate bonds and other financial assets three times this year in March, August and October to the current 55 trillion yen ($708 billion).
But pressure is building on central banks around the world to act because governments, saddled with enormous debt, cannot prop up their economies with fiscal outlays.
Yasuhide Yajima of the NLI Research Institute said the BOJ could be forced to resort to unorthodox monetary policy if the European sovereign debt crisis worsens.
"Next year is expected to be a trying one in which the BOJ will be called on to stretch the limits of monetary easing," he said.
As an example of unorthodox monetary policy, Yajima cited the possibility of the BOJ buying foreign government bonds with the asset-purchase fund.
The BOJ indicated on Dec. 21 that the Japanese economy has reached a temporary lull.
"The pick-up in Japan's economic activity has paused, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen," the BOJ said in a statement.
The central bank had also downgraded its economic assessment in November.
"Japan's economic activity has continued picking up, but at a more moderate pace mainly due to effects of a slowdown in overseas economies," the BOJ said in a statement on Nov. 16.
On Dec. 21, the nine Policy Board members decided by a unanimous vote to maintain the policy to encourage the unsecured overnight call rate, a benchmark short-term interbank interest rate, to remain between 0 and 0.1 percent.
The amount of the asset-purchase fund also remained unchanged.
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