Despite having the lowest overnight rate of the Group of Seven nations, Japan’s central bank unanimously voted today (Friday) to keep its key interest rate steady at 0.5%.

“Our judgment is that our current stance on monetary policy, under current conditions, is the best,” Bank of Japan (BOJ) Governor Masaaki Shirakawa told reporters at a press conference in Tokyo.

While President Jean-Claude Trichet of the European Central Bank (ECB) and U.S. Federal Reserve Chairman Ben S. Bernanke have taken a hawkish stance on inflation in recent days, Shirakawa felt it was not yet time for the BOJ to tighten its monetary policy. Trichet has even suggested the ECB could raise rates as early as July.

“People took it that he wasn’t joining on the hawkish axis that we’ve been hearing from the two other G3 central banks,” David Cohen, director of Asian economic forecasting at Action Economics in Singapore, told MarketWatch, referring to the recent anti-inflation rhetoric from central bank governors in the U.S. and Europe. “He didn’t appear to be shifting to a tightening bias just yet, still being focused on the weakening in the economy as their immediate concern.”

Shirakawa noted the effect high oil and commodity prices are having on the economy and said that Japan’s current expansion could be over as company earnings suffer under the current global economic environment.

“We must watch the downside risk that deteriorating terms of trade will erode incomes and hurt domestic demand,” Shirakawa said after today’s policy decision. “We need to monitor upside risks for prices relating to consumers’ inflationary expectations and companies’ price-setting actions.”

Derivatives are pricing in about a 95% chance of a Japanese rate hike by the end of this year, according to Reuters data, as the country is faced with the terrible prospect of stagflation caused by rampant inflation coupled with poor economic growth.

“The Bank of Japan has no choice but to take a wait-and-see stance,” Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, told Bloomberg News. Economic conditions “rule out the possibility of raising rates, while a rate cut is difficult because the governor has repeatedly said monetary conditions are accommodative.”

Source: Bank of Japan Plays Down Inflation Concerns