Steady Bank of Japan takes an upbeat tone

Short-term interest rate left unchanged

TOKYO: The Bank of Japan offered its most optimistic assessment of the economy in nine years at its policy meeting yesterday and described recent weakness in inflation as temporary, signalling confidence a sustained recovery will help achieve its ambitious price target.

The BoJ kept its policy unchanged, as expected, but governor Haruhiko Kuroda conceded that public perceptions of future price rises remained subdued, suggesting the central bank will significantly lag its US and European peers in exiting its massive stimulus programme.

The optimism about the economy and caution over the inflation outlook show the BoJ prefers to maintain the status quo on monetary policy for the time being, analysts say.

“The inflation and growth projections, as well as the upgrade of its economic assessment, were all in line with market forecasts, so there was no surprise at this meeting,” said Yasunari Ueno, chief market economist at Mizuho Securities.

“As long as the economy maintains its momentum, the BoJ will likely stand pat at least until next spring, when Kuroda serves out his term.”

The BoJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%.

It also kept intact a loose pledge to buy government bonds so its holdings increase at an annual pace of 80 trillion yen ($719 billion), defying market speculation the guidance could be removed to pave the way for an eventual withdrawal of stimulus.

“Japan’s economy has been turning toward a moderate expansion,” the BoJ said a quarterly review of its long-term economic and price projections, compared with the previous month’s view that it was “improving moderately as a trend.”

It was the first time since March 2008 the BoJ used the word “expansion” to describe the state of the economy, signalling its conviction that the recovery was gaining momentum and that it saw no need for additional stimulus.

Despite the rosy economic view, Kuroda reminded markets the central bank is nowhere near an exit from its massive stimulus.

“We expect inflation to accelerate toward 2% but currently, inflation is around zero%,” he told reporters after the policy meeting.

“Talking about a specific exit strategy now would cause undue confusion in markets,” Kuroda said. “The prerequisite for such debate to happen is for inflation to achieve 2%.”

He added that the BoJ had no automatic trigger for starting debate on exiting its ultra-loose monetary policy.

In the quarterly review, the BoJ cut its core consumer inflation forecast for the year ending in March 2018, blaming weak services prices and cellphone bill discounts by carriers facing fierce price competition.

But it maintained its projection that inflation will reach 2% during the fiscal year ending in March 2019 on the view that a tightening job market would gradually push up wages.

Many analysts doubt inflation will accelerate as quickly as the BoJ projects, with slow wage growth keeping households from boosting spending.

“The BoJ upgraded its economic assessment, but this is due more to overseas demand. Japan’s labour market is tight, but retailers still want to cut prices,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

Kuroda voiced confidence that continued improvements in the economy will eventually boost wages and inflation, but conceded that progress has been slow.

“Overall, inflation expectations haven’t shown clear signs of a pick-up. They have bottomed out but haven’t rebounded yet, so we need to look at developments carefully,” he said.

Japan’s economy has shown signs of life, as exports rose the most in over two years in March and manufacturers’ confidence hit the highest since the global financial crisis a decade ago.

But core consumer prices for February rose just 0.2% from a year earlier, as weak private consumption has discouraged companies from raising prices.

While a pioneer in deploying unorthodox stimulus, the BoJ is likely to lag behind its peers in withdrawing monetary support.

The US Federal Reserve is already embarking on interest rate hikes, while the European Central Bank may send a small signal in June towards reducing stimulus.

Most analysts polled by Reuters expect the BoJ’s next move to be a tightening of monetary policy, though many do not expect it to happen until next year at the earliest.

After more than three years of huge asset purchases failed to accelerate inflation, the BoJ revamped its policy framework l ast September to one aimed at capping long-term interest rates.