Kuroda upbeat on economy as BOJ leaves policy on hold

The Bank of Japan maintained its massive monetary stimulus and suggested the sales tax should rise again to help government finances, despite market doubts over the strength of the economy and the central bank's ability to hits its inflation target.

The central bank cut its assessment on housing investment and warned that factory output remained weak, a nod to pessimists on its board who fret that a rebound in the economy after a severe second-quarter contraction may be quite modest.

A recent run of weak Japanese data, including a slump in household spending and tepid factory output growth in July, has cast doubt on the BOJ’s view that the economy will pick up steadily after the pain inflicted by a first sales tax rise in April.

But the central bank, while holding policy unchanged on Thursday as expected, maintained its projection that the economy would continue to recover moderately, with consumption set to benefit from a tightening job market, which is pushing up wages.

BOJ governor Haruhiko Kuroda remained optimistic that the economy was gradually pulling out of 15 years of deflation and was on its way to hitting his 2 percent target for inflation.

“Exports and output are showing weak movements,” he told a news conference after the policy meeting. “But job and income conditions are improving steadily, and household confidence is firm. Companies, reflecting improving earnings, are maintaining their bullish investment plans. A positive economic cycle remains in place.”

Asked whether Japan should proceed with the second stage of a sales tax increase to 10 per cent from 8 per cent next year, Mr Kuroda said that was for the government and parliament to decide.

“But it’s very important for Japan’s fiscal state and for its economy that steady progress is made in efforts to restore fiscal health,” he added.

Retaining last month’s assessment, the central bank said the world’s third-biggest economy “continues to recover moderately as a trend”, although the effects of the sales tax hike in April are lingering.

Private consumption is firm as the effect of the sales tax increase to 8 per cent from 5 per cent is easing, although housing investment continues to feel the pinch from the higher tax, the BOJ said.

In August, it said the impact on both housing investment and consumption was waning.

In contrast, doubts are growing among private-sector analysts that the economy can grow strongly enough to see consumer price inflation - now around 1.3 percent - accelerate toward the central bank’s target.

The BOJ stuck with its “quantitative and qualitative easing” framework, under which it has pledged to increase base money by 60-70 trillion yen ($571-$666 billion) per year via aggressive asset purchases to reflate the long-moribund economy.

Offering some relief to policymakers, Japan's Nikkei stock average hovered around a seven-month high on Thursday on hopes that Wednesday's cabinet reshuffle by prime minister Shinzo Abe would give fresh momentum to his growth-oriented policies.

Japan’s economy shrank by an annualised 6.8 per cent in the second quarter, more than erasing a first-quarter surge in the run-up to the sales tax increase.

Sources have told Reuters that the BOJ is likely to keep its bullish price forecasts even if it cuts its economic growth forecast in October.

Behind the BOJ’s optimism is a steady improvement in the labour market and income conditions.

The jobless rate is at levels the BOJ sees as approaching full employment and job availability is at a 22-year high. Summer bonuses jumped in July and basic pay rose for the second month after falling for more than two years, data showed on Tuesday, supporting the BOJ’s argument that rising household income would underpin consumption and help nudge up inflation.

Under its “quantitative and qualitative easing” programme launched in April last year, the BOJ pledged to achieve its 2 per cent inflation target in roughly two years, in an economy that had languished during 15 years of deflation.

Despite repeated reassurance by Mr Kuroda that Japan is on track to meet the price target, many private-sector analysts doubt inflation will accelerate to 2 per cent next fiscal year.

Reuters