The Bank of Japan raised its economic growth forecasts on Tuesday, but kept its policy stance unchanged, as was widely expected in its latest policy review.
The central bank raised its gross domestic product (GDP) forecast to 1.4 percent for the current fiscal year, from its previous forecast, made in October, of 1.0 percent growth. For fiscal 2017, it raised its economic growth forecast to 1.5 percent, from 1.3 percent, and for fiscal 2018, it raised its forecast to 1.1 percent, from 0.9 percent.
The BOJ said in a statement on Tuesday that it expected inflation to rise to around its target of 2 percent around fiscal 2018. It cited signs that medium-to-long term inflation expectations have stopped declining and were showing some indications of rising.
It also noted the labor market was tightening and that the effects of commodity-price declines were set to dissipate, with a pickup in international commodity prices set to push up consumer prices.
For the current fiscal year, it expected the consumer price index (CPI) excluding fresh food, its preferred indicator, would fall 0.2 percent, compared with its October forecast for a 0.1 percent fall, but in fiscal 2017, the BOJ expected inflation of 1.5 percent.
Analysts at DBS said in a note before the announcement that growth upgrades could be justified.
"Japan's exports and manufacturing have showed clear signs of recovery compared to a quarter ago, thanks to the improvement in the global economy, rebound in commodity prices and depreciation of the yen," DBS said.
The yen briefly strengthened after the decision, with the dollar fetching as little as 113.21 yen after the announcement, compared with as much as 113.73 yen shortly before the statement. At 11:35 a.m., the dollar was fetching 113.53 yen.
The BOJ decision followed some signs of improvement in the economy, but was likely tempered by uncertainty as the U.S., one of Japan's key trading partners, appeared set to pursue protectionist policies.
In its statement of risks, the BOJ mentioned developments in the U.S. economy and monetary policy, emerging market economies, particularly China, the consequences of Brexit and European debt issues as well as unspecified geopolitical risks.
The central bank had been widely expected to stay the course with its current yield-curve control policy, introduced at its late-September meeting.