Central Banks

BOJ seen upbeat despite Japan slowdown

A pedestrian walks past the Bank of Japan headquarters in Tokyo, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images

The Bank of Japan is expected to hold off on expanding stimulus on Tuesday, holding fast to existing plans to beat chronic deflation even as a sales tax hike clouds the outlook for the world's third-largest economy.

Unfazed by recent signs of weakness in the economy, the central bank is set to maintain its current monetary policy settings at a two-day meeting ending on Tuesday, and affirm its conviction that the economy is on track to meet the target of 2 percent inflation within a year or so.

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A run of recent data has cast doubt on Premier Shinzo Abe's reflationary policies, including the central bank's own "tankan" survey. It showed companies expect inflation to remain subdued in coming years, and see a worse consumer chilling effect from last week's tax hike than from the previous increase in 1997.

But Governor Haruhiko Kuroda and other central bank officials appear unshaken, pointing to positive signs such as shrinking slack in the economy that should help them meet their pledge of accelerating inflation to 2 percent by around April next year.

Supermarkets raised prices on top of the sales tax hike, according to a daily price index maintained by Tokyo University Professor Tsutomu Watanabe, supporting the BOJ's view the economy is now strong enough for retailers to pass the levy to households.

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The BOJ is therefore widely expected to maintain its commitment to increasing base money, its key policy gauge, at an annual pace of 60-70 trillion yen ($579-$676 billion). It is also seen sticking to its assessment the economy will recover moderately.

"The BOJ's message will remain the same, which is that things are on track and there's no need now for more stimulus," said Izuru Kato, chief economist at Totan Research in Tokyo.

"I think Kuroda is no mood to act any time soon. But if doubts emerge over its rosy projections, the BOJ may ease again in June or July," he said.

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Friday's upbeat U.S. payrolls data also bode well for the BOJ, which is counting on strong U.S. growth to make up for slow sales of Japanese goods to emerging markets.

No heat yet

The BOJ has held policy steady since launching an intense burst of stimulus last April, when it pledged to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases to beat nearly two decades of deflation.

Kuroda has repeatedly said Japan can overcome the disruption from the tax hike without additional monetary stimulus, although he has stressed the bank is ready to act if the achievement of its price target is threatened.

He is likely to reiterate at a post-meeting news conference that Japan is making steady progress in meeting the bank's price goal, suggesting no stimulus is forthcoming in the near-term.

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But such assurances may do little to alter expectations for more action. A Reuters poll showed analysts expect the BOJ to ease again by July on doubts that core consumer inflation, which rose an annual 1.3 percent in February, will accelerate further.

Analysts betting on further BOJ action also point to an expected heightening of political pressure toward year-end, when Abe must decide whether to proceed with another increase in the sales tax in October 2015.

Most policymakers and private-sector economists expect the economy to rebound in July-September after a mild contraction in the second quarter due to the tax hike, which rose to 8 percent from 5 percent on April 1.

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But if the rebound proves too weak to justify raising the tax again, the BOJ may pre-empt political calls for action by easing around June or July, said Totan's Kato.

For now, however, the BOJ is barely experiencing any political pressure. Economics Minister Akira Amari on Friday praised the BOJ for doing "extremely well" with its policy proving effective.

Yasuhisa Shiozaki, a senior ruling party lawmaker, also expressed confidence on Friday that the BOJ can achieve its price target, adding that expanding stimulus again won't be easy.

The BOJ is seen adopting an upbeat post-meeting tone that could lay the groundwork for the central bank's semi-annual outlook on the economy and prices due April 30.

Many analysts expect the BOJ to cut its economic growth estimate of 2.7 percent for the year that ended in March, taking into account a downward revision in gross domestic product growth in the final quarter of last year.

But the central bank is likely to maintain its bullish price forecasts and predict consumer inflation accelerating towards 2 percent in coming years, on a view that brisker economic conditions will push up wages and prices.

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