BOJ keeps policy steady; focus on inflation forecasts

The Bank of Japan maintained its massive monetary stimulus today, holding off on additional easing for now on hopes that rising wages will spur spending and eventually nudge inflation towards its 2 per cent target.

Markets are now focusing on the central bank's semi-annual report on the economic and price outlook, due later on Thursday, for clues on how confident it is about Japan's economic recovery and prospects for hitting its ambitious inflation target.

With inflation having ground to a halt due to slumping oil prices, the BOJ is seen slightly cutting its core consumer inflation forecast of 1.0 per cent for the current fiscal year ending in March 2016, sources say.

But the nine-member board is likely to project inflation will hit roughly 2 per cent in the following two years. Such bullish forecasts on the long-term outlook likely led the BOJ's nine board members to forgo easing policy for now.

However, the board may consider watering down the timeframe for hitting the inflation target. At present, it expects Japan to hit 2 per cent inflation at or around the current fiscal year.

As widely expected, the BOJ maintained its pledge to increase base money at an annual pace of ¥80 trillion ($674 billion) through purchases of government bonds and risky assets.

Still, many analysts expect the BOJ to ease policy later this year as inflation slides further away from its ambitious target.

"While additional easing is unlikely to take place this week, we think additional BOJ stimulus is a matter of time," HSBC economist Izumi Devalier said in a research note.

"We believe the central bank will announce enhanced easing measures by the end of the second quarter, most likely at the June 19 policy meeting."

Japan is emerging from recession but at a snail's pace, as companies remain wary of ramping up spending despite record profits and consumers keep their purse strings tight.

Despite a raft of weak data so far this year, the government appears to be in no mood to pressure the BOJ to do more at this time. Japan's vice economy minister said recently it would "not be a big deal" if the timing for hitting 2 per cent inflation is delayed by oil price falls.

Aides close to Premier Shinzo Abe have said further monetary easing could trigger unwelcome falls in the yen that would boost import costs, offsetting the benefits consumers and small firms are enjoying from the falling cost of fuel.

BOJ Governor Haruhiko Kuroda has also voiced confidence his massive stimulus programme was succeeding in cracking the "deflationary mindset" that haunted Japan for 15 years.

The BOJ surprised markets last October by expanding its asset purchase programme after cutting its forecasts, days after Kuroda had assured parliament that a recovery was on track.

Central bankers have stressed since then that they will look through the effect of lower oil costs, which are largely blamed for inflation evaporating in February.

But consumption has failed to rebound, underscoring doubts held by analysts that inflation will accelerate as quickly as the BOJ projects.

Analysts polled by Reuters expect core consumer inflation to hit 0.3 per cent this fiscal year and 1.3 per cent the following year, barely half the pace projected by the BOJ.

"I expect the BOJ to downgrade this fiscal year's CPI forecast to 0.6 or 0.7 percent inflation and emphasise that it expects domestic demand-driven inflation to pick up in the second half of the fiscal year," said Daiju Aoki, senior economist at UBS Securities.

"The BOJ will take a wait-and-see stance. Easing now is not going to push up wages."

($1 = ¥ 118.7800)

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