World

Bank of Japan stands pat on policy, warns of weak factory output

Reuters Tokyo | Updated on October 07, 2014 Published on October 07, 2014

No policy change expected, debate begins on new forecasts

The Bank of Japan on Tuesday maintained its massive asset buying programme but offered a bleaker view on factory output, following signs that the world's third-largest economy was hit harder than expected by a sales tax increase in April.

Policymakers stuck to their view that the economy will resume a moderate recovery and achieve the bank's 2 per cent inflation target next year without more monetary easing, but also acknowledged that weak consumer spending is hurting output and business sentiment.

BOJ Governor Haruhiko Kuroda maintained that optimism earlier in the day, telling parliament that a positive economic cycle remained in place, with households and companies increasing spending as they see incomes rising.

Sales tax weighs

But he warned of potential risks to growth and stressed anew that the central bank was ready to ease monetary policy further if the economy and prices undershoot its forecast.

"It's true the effect (of the sales tax hike) on the economy is being prolonged. There's also the effect of bad summer weather," Kuroda told parliament.

The BOJ's policy meeting on Tuesday was interrupted because Kuroda was summoned to speak in parliament, a rare event that last happened in September 1998.

An intense burst of monetary and fiscal stimulus, which were the first two "arrows" of Prime Minister Shinzo Abe's strategy to end 15 years of deflation, has helped boost business sentiment by lifting share prices and weakening the yen.

But his growth strategy to boost Japan's long-term economic potential, dubbed the third arrow of "Abenomics," has disappointed markets and, along with a spate of weak data, has cast doubts on the success of reviving the economy on a sustained basis.

"Japan's economy continues to recover moderately as a trend, but there is some weakness in production ... after the sales tax hike," the BOJ said in a statement after the meeting.

This was different from last month's statement, which said the economy "continues to increase moderately as a trend, although the effect of the April tax hike remains."

Markets will focus on Kuroda's assessment on risks to the outlook at his post-meeting briefing, as recent data suggest the economy may have entered a mild recession following the blow from the April sales tax hike to 8 per cent from 5 per cent.

The BOJ maintained its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60-70 trillion yen ($547-$638 billion) through purchases of government bonds and risky assets, as widely expected.

After a surprise slump in August factory output, the BOJ cut its assessment on production, saying output has been weak due partly to inventory adjustments. It said last month that the trend in output was for a continued rise, albeit with some weaknesses.

The fallout from the April sales tax increase has also led to a pause in improvement in business sentiment, the BOJ said.

Inflation expectations turning flat

BOJ board member Sayuri Shirai objected to the central bank's statement that inflation expectations are rising on the whole.

Instead, she proposed saying that more indicators show inflation expectations have turned flat recently, the statement showed.

Kuroda is likely to signal at his press conference that simply maintaining its stimulus will be sufficient to hit its inflation target, unless there are strong signs Japan will sink into prolonged recession, analysts say.

The central bank has stood pat on monetary policy since deploying an intense burst of stimulus in April last year, when it pledged to achieve its 2 per cent inflation in roughly two years via aggressive asset purchases.

Still, the central bank may come under renewed pressure to expand stimulus if the economic weakness persists, ahead of a decision expected from Abe by year-end on whether to proceed with another sales tax hike to 10 per cent in October 2015.

"The contraction in April-June economic growth was within expectations. The focus is on whether the economy will rebound strongly in the third quarter," Abe told parliament on Monday, when asked whether he will go ahead with the tax hike next year.

Debate at the two-day BOJ policy review, which concluded on Tuesday, will lay the groundwork for a more crucial policy meeting on Oct. 31, when the nine board members issue new quarterly long-term economic and price projections.

Given signs of a delay in the recovery, they are likely to roughly halve their economic growth forecast for the current fiscal year from the present projection of 1.0 per cent, the sources familiar with BOJ thinking said.

That would still be far more optimistic than a 0.3 per cent rise seen by analysts polled by Reuters.

But, the sources said, the BOJ is in no mood to cut its consumer inflation forecast yet, worried that doing so will give markets the impression it is not confident of meeting the target next year and heighten speculation of imminent monetary easing.

Published on October 07, 2014
This article is closed for comments.
Please Email the Editor