Low rates will soften slump: Japan's Shirakawa

At a speech to business leaders in Osaka, Shirakawa said that although Japan "faces a difficult situation given the sluggishness in the economy and the rise in prices" and is feeling the effects of the global credit crunch and the rise in energy prices, it was better placed than most countries to ride out the storm.

"Growth will likely remain sluggish against the backdrop of high energy and materials prices and weaker growth in exports due to a slowdown in overseas economies; however, Japan's economy is unlikely to experience a deep adjustment phase," he said.

Shirakawa argued that the outlook for the country was relatively benign due to adjustments undertaken during the 1990s which had made the economy more resilient to external shocks, its banks having less exposure to subprime debt than those of the US or Europe, and monetary policy remaining relatively accommodating.

"It is reasonable to expect, as the main scenario, that Japan's economy will return gradually to a moderate growth path as commodity prices level out and overseas economies move out of their deceleration phase," he said. The governor also said however that given recent trends in energy and commodity prices, the bank would continue to focus "on the upside risks to inflation".

At 0.5%, Japan's key rate is the lowest in the developed world. The rate has not moved in 21 votes. Analysts do not expect any movement until at least the first half of 2008.

Click here to read the speech