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BOJ stands pat, keeps upbeat view despite Japan slowdown
TOKYO, April 8:
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 outlook for the world’s third-largest economy.
The central bank maintained its upbeat view on the economic outlook and affirmed its conviction that Japan is on track to meet its 2% inflation target by around April next year, signalling that no further easing was on its near-term horizon.
But it did take note of its own “tankan” 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 announcing the policy decision.
“Business sentiment has continued to improve, although some cautiousness about the outlook has been observed,” it said.
As widely expected, the BOJ maintained its commitment to increasing base money, its key policy gauge, at an annual pace of 60-70 trillion yen (US$580-US$675 billion).
“I think the BOJ are hedging their view a little bit. There is an element of increased caution,” 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 skeptical about a big increase in the monetary base target.”
A run of recent data has cast doubt on Premier Shinzo Abe’s reflationary policies, including the tankan and soft exports.
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% by around April next year.
Financial markets are waiting on BOJ Governor Haruhiko Kuroda’s post-meeting news conference for any clues on whether the central bank will blink in the wake of the recent soft data.
“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.
“I think Kuroda is no mood to act any time soon. But if doubts emerge over its rosy projections, the BOJ may ease again in June or July,” he said.
No heat yet
The BOJ launched its intense burst of stimulus last April, when it pledged to lift inflation to 2% 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 on top of 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% 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 mild contraction in the second quarter due to the sales tax hike, which rose to 8% from 5% on April 1.
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% 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% in coming years, on a view that brisker economic conditions will push up wages and prices.