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The Bank of Japan (BoJ) kept monetary policy unchanged on Friday, but offered a bleaker view on exports and output.
As expected, the BoJ maintained its pledge to increase base money by 60-70 trillion yen ($592-$691 billion) per year via aggressive asset purchases, mostly in Japanese government bonds.
In a media briefing following the decision, Governor Haruhiko Kuroda remained upbeat about the outlook for the economy, despite increasing evidence of a slowdown largely brought on by April's 3-percentage-point consumption tax hike.
"Japan's economy is likely to continue recovering moderately with the effect (of an April sales tax increase) seen gradually subsiding," Kuroda told a news conference.
"Exports and output have been weakening. But a positive economic cycle remains in place as job and income conditions steadily improve," he added.
While most analysts don't expect the BOJ to add further stimulus this year, there have been growing calls for the central bank to do more, on back of worsening economic data.
Data released on Friday showed Japan's current account swinging to a deficit in June for the first time in five months, due to a decline in earnings on overseas investments.
"The BoJ left policy settings unchanged today, but a more aggressive pace of purchases may still eventually be required," said Marcel Thieliant, Japan economist with Capital Economics, who expects low inflation to be the trigger.
"[BoJ] board members expect inflation excluding tax to remain around 1.25 percent until the middle of the current fiscal year, and pick up towards year-end. In contrast, we expect underlying inflation to moderate towards 1 percent by year-end, and to fall short of the BoJ's expectations over the next two years, Thieliant noted. "If we are right, policymakers may still conclude that an increase in the pace of purchases is needed."
"We marginally favor April 2015 as the most likely timing for the announcement of a more aggressive version of QE (quantitative easing)," he added. "The pace of expansion may then be increased from the current ¥60-70 trillion to perhaps ¥90 trillion per annum."
According to a note from Societe Generale, the BoJ's rosy outlook for the economy is likely to be revised downwards when second quarter growth, scheduled for release next week, shows a significant contraction.
"This may completely offset the strong +1.6% qoq growth recorded in Q1 due to the front loaded surge in consumption ahead of the consumption tax hike implemented on 1 April," said Societe Generale's Takuji Aida, who also expects further stimulus by April next year.
"The BoJ expects that reduced concerns over the social security system will partially offset the negative impact on consumption by the tax hike. However, such an optimistic view cannot be justified by the increased downside risk to growth in Q2," he added.