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BOJ stands pat on policy, keeps economic view intact

Thursday, 19 Dec 2013 | 10:44 PM ET

The Bank of Japan kept monetary policy steady on Friday and maintained its view that the economy is recovering moderately, encouraged by growing signs that the benefits of its massive stimulus are spreading through broader sectors of the economy.

With the BOJ maintaining its ultra-easy policy even as the U.S. Federal Reserve begins to wind down its own mega-stimulus, the widening interest rate gap between the two economies will help keep the yen weak against the dollar, analysts say.

The dollar struck 104.44 yen on the EBS trading platform on Friday, its highest level since October 2008.

A weak yen benefits Japan's export-reliant economy, and will help the BOJ attain its target of 2 percent inflation target within two years to decisively Lift the country out of a long phase of debilitating deflation.

Governor Haruhiko Kuroda is likely to stress at a post-meeting news conference that the Japanese central bank's resolve to maintain its ultra-loose stimulus even as the Fed begins dialing back its massive asset-buying program.

(Read more: So far, Abenomics is 'close to a bull's eye')

As widely expected, the BOJ voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60 trillion yen ($576 billion) to 70 trillion yen.

Tankan: More proof that Abenomics is working
Masyuki Kichikawa, MD & Chief Japan Economist at Bank of America Merrill Lynch says improved sentiment among smaller firms, increased capital expenditure and a weaker yen are all helping Japan's economy.

"Japan's economy is recovering moderately," the central bank said in a statement announcing the policy decision, unchanged from its assessment last month.

But the BOJ slightly tweaked its view on the outlook to signal that it was mindful of the potential pain on the economy from an increase in the national sales tax in April next year.

(Read more: Abenomics scorecard: 'A' for early initiative, 'C' for follow-through)

"The economy is expected to continue a moderate recovery as a trend, while being affected by an increase and subsequent decline in demand prior to and after the consumption tax hike," it said. Last month, the BOJ said the economy is expected to continue recovering moderately.

Tax Hike Looms

The Fed's smooth start in dialing down its massive stimulus without disrupting markets likely came as a relief for the BOJ, as it underscored the strength of the U.S. economy and may give it more time to decide whether further stimulus will be needed in Japan next year, analysts say.

Markets are on the lookout for clues from Kuroda's comments on how the Fed's tapering could affect the BOJ's decision on if and when it might next expand stimulus.

The BOJ offered an intense burst of monetary stimulus in April, pledging to double the supply of money in two years by boosting purchases of government bonds and risky assets. It has stood pat on monetary policy since then.

With the economic recovery gathering momentum and the weak yen supporting exports, the BOJ sees no reason to consider easing policy further any time soon.

(Read more: Shinzo Abe's letdown puts onus on Bank of Japan)

But central bankers foresee challenges next year, when the sales tax hike hits consumers and inflation loses some of the boost passed on by a weak yen through higher import costs.

The BOJ has said the economy can withstand the pain from the tax hike and the 2 percent inflation goal is achievable without additional stimulus.

But even some members of the BOJ board worry about the effects of the tax hike and share doubts held by analysts that the two-year timeframe to reach 2 percent inflation is overly ambitious.

Japan's economy outpaced its G7 counterparts in the first half of this year as Abe's stimulus policies boosted business and household sentiment.

Growth slowed in July-September, but is seen accelerating again due to extra demand generated by buying ahead of the sales tax hike, plus an increase in public works spending under a fiscal stimulus plan to cushion the pain from the tax hike.

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