Japan Holds Key Interest Rate Unchanged

Updated from 12:20 a.m. EDT

By Yuri Kageyama

TOKYO -- The Bank of Japan upgraded its assessment of the world's second-largest economy and held its key interest rate unchanged at a near-zero 0.1% Thursday as it tries to nurture a recovery.

The unanimous and widely anticipated decision on the overnight call rate came at the end of the central bank's two-day policy board meeting.

"Japan's economic conditions are showing signs of recovery," the bank said in a more optimistic tone than its previous statement, which had said the economy had "stopped worsening."

The bank cited a rebound in exports and public spending as underpinning a recovery, while pointing to weak consumer spending and surging unemployment as risks.

Japan eked out its first quarter of growth in the April-June period after a year-long contraction, but the jobless rate has reached a record high 5.7%, and salaries are falling. Prices also have been waning, setting off worries about deflation, which could further sap energy from the economy.

The central bank said stable prices were likely to return in the long run, although the outlook remained uncertain amid worries about overseas economies and global financial markets.

The central bank has kept its key rate unchanged at near zero since December, when it cut the rate from 0.3%.

Japan's top companies, such as Toyota(TM Quote) and Sony(SNE Quote), remain heavily reliant on exports and were hard hit by the plunge in global demand.

They have posted deep losses and are expecting the red ink to continue in the months ahead, but are banking on a resurgence of demand from China and other emerging markets.

The Japanese economy grew at an annual pace of 2.3% in the April-June period, joining Germany, France and other nations in marking a gradual recovery.