BOJ stands pat, keeps upbeat view despite Japan slowdown

Some BOJ-watchers, however, detected a note of caution in the bank`s assessment.

Reuters| Updated: Apr 08, 2014, 17:00 PM IST

Tokyo: The Bank of Japan stuck to its existing monetary stimulus on Tuesday, confident that it did not need further support measures to beat chronic deflation - even as a sales tax hike clouds the economic outlook.

The central bank maintained its upbeat view on the economy, affirming its conviction that Japan is on track to meet its 2 percent inflation target by around April next year, signalling that no further easing was on its near-term horizon.

"A positive-cycle mechanism continues to operate in the Japanese economy, supported by firm domestic demand," BOJ Governor Haruhiko Kuroda told a news conference after the central bank`s unanimous decision, which was widely expected.

Kuroda`s sustained upbeat stance and the unanimity of his board`s decision bolster the view that the BOJ will not waver in the face of recent soft data - despite market expectations that the bank may have to ease further in coming months.

"The BOJ`s message will remain the same, which is that things are on track and there`s no need now for more stimulus," said Izuru Kato, chief economist at Totan Research in Tokyo.

The central bank took note of its own "tankan" business survey last week that showed companies see a worse impact on consumers from the April 1 sales tax hike than from the previous increase in 1997.

"Japan`s economy continues to recover moderately as a trend, albeit with some fluctuations caused by the tax hike," the BOJ said in a statement. "Business sentiment has continued to improve, although some cautiousness about the outlook has been observed."

Kuroda took a brighter view of the closely-watched tankan, saying companies see a steady rise in prices and that their price expectations were higher than many economists had forecast.

The BOJ maintained its commitment to increasing base money, its key policy gauge, at an annual pace of 60-70 trillion yen.

Some BOJ-watchers, however, detected a note of caution in the bank`s assessment.

"I think the BOJ are hedging their view a little bit," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities in Tokyo. "We don`t rule out the possibility of an increase in risk asset purchases like ETFs, but we are quite sceptical about a big increase in the monetary base target."

A run of recent data, including the tankan and soft exports, has cast doubt on Prime Minister Shinzo Abe`s reflationary policies, but BOJ officials have been largely unfazed, pointing to positive signs such as shrinking slack in the economy that should help them meet their pledge of accelerating inflation to 2 percent by around April next year.


The BOJ launched an intense burst of stimulus last April, when it pledged to lift inflation to 2 percent in roughly two years to beat nearly two decades of deflation.

Kuroda has repeatedly said the disruption from the tax hike could be weathered without additional monetary stimulus, although he has stressed the BOJ is ready to act if needed.

Indeed, supermarkets raised prices over and above the sales tax hike, according to a daily price index maintained by Tokyo University Professor Tsutomu Watanabe, supporting the BOJ`s view the economy is now strong enough for retailers to pass the levy to households.

But such assurances from the BOJ may do little to alter expectations for more action. A Reuters poll showed analysts expect the central bank to ease again by July on doubts that core consumer inflation, which rose an annual 1.3 percent in February, will accelerate further.

Analysts betting on further BOJ action also point to an expected heightening of political pressure toward year-end, when Abe must decide whether to proceed with another increase in the sales tax in October 2015.

Most policymakers and private-sector economists expect the economy to rebound in July-September after a contraction in the second quarter due to the sales tax hike, which rose to 8 percent from 5 percent on April 1.

Kuroda said the economy will take a hit this quarter from the tax hike but rebound from the summer onward.

Economics Minister Akira Amari on Friday praised the BOJ for doing "extremely well" with its policy proving effective.

The BOJ`s upbeat tone on Tuesday lays the groundwork for the its semi-annual outlook on the economy and prices due April 30.

Many analysts expect the BOJ to cut its economic growth estimate of 2.7 percent for the fiscal year that ended in March, taking into account a downward revision in gross domestic product growth in the Oct-Dec quarter.

But the central bank is likely to maintain its bullish price forecasts and predict consumer inflation accelerating towards 2 percent in coming years, on a view that brisker economic conditions will push up wages and prices.