Rising food and oil prices, along with the risk of a U.S. economic slowdown spilling into the global economy, were putting downward pressures on Japanese growth prospects. However, with interest rates already very low, the expected moderation in GDP would only be temporary, according to the statement released with the decision.

The BOJ also cut its GDP target to 1.5% from 2.1%, adding that it expects core CPI to grow 1.1% rather than the previous 0.4% growth expected for 2008. The BOJ also said GDP and core CPI would average around 1.7% and 1.0% respectively in 2009. The Bank also said the path of monetary policy was difficult to determine given the large amount of uncertainty surrounding the economic situation in the region.

In a press conference following the announcement, Maasaki Shirakawa, the Bank's newly appointed governor, said monetary policy was more flexible than ever given the uncertainties surrounding the Japanese economic outlook. He said the Monetary Policy Board was carefully paying attention to consumer's inflation expectations, adding that the recent jump in price growth was due to both supply and demand factors. Shirakawa also said the risks to the Japanese economy would be more balanced in 2009.

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