Japan's central bank, headed by Bank of Japan Governor Masaaki Shirakawa, decided unanimously on Friday to keep its key interest rate at 0.01 percent. The seven member Policy Board stated it would not tolerate deflation.

"The bank recognizes that it is a critical challenge for Japan's economy to overcome deflation and return to a sustainable growth path with price stability," the Bank of Japan (BOJ) said in a statement to the press.

"The Policy Board does not tolerate a year-on-year rate of change in the consumer price index equal to or below zero percent," the BOJ added in clarification to its stance on price stability for the medium to long term. Price declines amid a climate of deflation would undermine the economy's recovery, according to analysts.

According to the policymakers, the desirable medium to long-term price stability is the consumer price index stabilizing in a positive range of 2 percent or lower, said the BOJ.

Having unveiled it's 10 trillion yen loan program at an emergency policy meeting held on Dec. 1, aimed at tackling deflation and aiding Japan's export-driven economy, the BOJ maintained that the pace of improvement in the economy is likely to remain ''moderate'' until around the middle of fiscal 2010.

As for the current state of the Japanese economy, the BOJ's assessment was that thanks to stimulus measures things are, "picking up."

"The BOJ felt compelled to show that it doesn't accept deflation and is committed to fighting it," said Yasunari Ueno, a chief market economist at Mizuho Securities Co. "It's reinforcing the view that interest rates will stay very low."

(Xinhua News Agency December 18, 2009)