GO
Loading...

Bank of Japan maintains stimulus, more upbeat on capex

Thursday, 3 Oct 2013 | 10:55 PM ET
Koichi Kamoshida - Getty Images

The Bank of Japan maintained its massive monetary stimulus on Friday and upgraded its view on capital expenditure, encouraged by growing signs that the benefits of its aggressive policy action to escape deflation are broadening.

After a two-day review, the central bank reiterated its view the world's third-largest economy is recovering moderately, suggesting that no additional monetary policy measures are needed to counter the pain from next year's sales tax hike.

"Capital expenditure is picking up as corporate profits improve," the BOJ said in a statement. That was slightly more optimistic than last month, when it said capital spending was showing signs of a pick-up.

(Read more: Biggest event for Japan markets this week: Baseball?)

BOJ needs to ease more: Nomura
Tomo Kinoshita, Chief Economist, Japan, Nomura says more easing is needed in Japan by mid-2014 because inflation is unlikely to reach the 2% target.

As widely expected, the BOJ kept intact its April commitment to double base money via asset purchases to meet its target of lifting inflation to 2 percent in roughly two years.

The policy review followed Prime Minister Shinzo Abe's decision on Tuesday to proceed with a planned increase in the sales tax to 8 percent from 5 percent next April and cushion its impact with a 5 trillion yen ($51 billion) stimulus package.

(Read more: What happened to a weak yen?)

In a news conference later on Friday, BOJ Governor Haruhiko Kuroda is expected to welcome Abe's decision as an important first step in reining in Japan's huge public debt which, at double the size of its $5 trillion economy, is the biggest among major industrialized nations.

The BOJ expects the sales tax increase to shave about 0.7 percentage point off growth. For now, it sees no need to expand its stimulus further, confident that the world's third-largest economy can withstand the hit.

"I don't think the BOJ's view that the sales tax hike won't derail the recovery is too optimistic," said Junko Nishioka, chief Japan economist at RBS Securities.

(Watch now: Has Japan's economy reached 'escape velocity'?)

"But the 2 percent inflation remains a distant goal. Core consumer inflation could hit 1 percent early next year. But it's an uphill battle from there."

Sources familiar with the BOJ's thinking say given the tax rise is factored into its outlook, the government's stimulus package could see the central bank revise up its long-term growth forecasts, due for release on Oct. 31.

Abe jolting Japan's economy
Japanese Prime Minister Abe says there will be a significant tax increase to help tackle the nation's massive debt burden, reports CNBC's Kaori Enjoji,

The board was expected to have debated the benefits the fiscal package will deliver to the economy, as well as global risks such as the U.S. government shutdown and the October 17 deadline for a deal to raise the U.S. debt ceiling.

Big test next year

Japan's economy has now grown for three successive quarters as Abe's reflationary policies bolstered household spending and drove down the yen, benefiting exports, with annualized growth of 3.8 percent in April-June outpacing many G7 nations.

(Watch now: Abenomics making Japan stocks attractive: Pro)

Big manufacturers' sentiment has risen to its highest in nearly six years, the BOJ's "tankan" survey for the September quarter showed, underscoring its view the economy is on track for a moderate recovery.

Policymakers see capital expenditure and wage growth as key in achieving a sustained economic recovery and pulling Japan out of deflation, because companies have been hoarding cash instead of spending for decades due to the murky economic outlook.

The BOJ estimates that even with the sales tax increase, the economy will expand 1.3 percent in the business year beginning in April next year. This already far outpaces the 0.7 percent growth projected in a recent Reuters poll.

(Watch now: Japan will slow down: Strategist)

Having launched its intense burst of stimulus in April, the BOJ does not want to act again easily. But it has not ruled out expanding stimulus if the damage from the tax hike proves bigger than expected and threatens achievement of 2 percent inflation.

The big test will come in spring next year, and not just from the sales tax hike. There will also be more clarity on whether companies will raise wages enough to offset some of the pain households will feel from the tax hike, BOJ officials say.

Featured

Contact Central Banks

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More