8:55 pm - Friday November 6, 2015

Bank of Japan refrains from boosting stimulus as recovery seen

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Buildings are reflected on a Bank of Japan board in Tokyo

Tokyo – The Bank of Japan (BoJ) refrained from adding extra stimulus as policymakers said the world’s third-biggest economy can maintain a recovery even with last week’s increase in the sales tax.

Governor Haruhiko Kuroda and his board kept a pledge to expand the monetary base at a pace of ¥60 trillion to ¥70 trillion ($681 billion) per year, the central bank said in a statement on Tuesday in Tokyo, as forecast by all 36 economists in a Bloomberg News survey. The economy has continued to recover moderately, albeit with some fluctuations due to the consumption tax hike, the BoJ said.

While the central bank highlighted a pickup in private investment and increasing industrial production, economists forecast the BoJ will boost stimulus by July, according to a Bloomberg News survey ahead of Tuesday’s decision. The economy faces challenges ranging from emerging inflation that hurts households’ spending power to export volumes failing to gain.
“I expect the BoJ to add expansive policy between May and July,” Yasuhide Yajima, chief economist in Tokyo at NLI Research Institute, said before Tuesday’s decision. “The economy will slow down and price increases will be sluggish from April to June because of the sales-tax hike.”

The yen weakened after the announcement, and was trading at 103.01 per dollar at 12:56pm in Tokyo, up 0.1%. The Topix index, which has climbed 7% over the past year, fell 1.4%, down for a third day after technology shares extended a retreat.

Economic contraction

The BoJ is gauging the extent of an anticipated setback to the economy and prospects for achieving its 2% inflation goal after last week’s 3-percentage-point increase in the sales tax, the first since 1997. The price goal excludes the effects of changes in the sales tax.

The central bank’s benchmark price gauge rose 1.3% in February from a year earlier, and companies see price gains persisting for at least the next five years, in what would mark an end to 15 years of deflation. The economy is forecast to shrink an annualized 3.5% in the three months from April, breaking a projected six straight quarters of growth.

Kuroda has said he will adjust record easing that the BoJ began in April last year should prospects for achieving the price target within an initial two-year timeframe be jeopardized. The challenge for Kuroda will be to avoid any perception of incremental policy steps, an approach he has vowed to avoid.

Forty-four per cent of economists predict the BoJ will add to stimulus in July, when the strength of an economic rebound will become clearer, the Bloomberg News survey showed.

Stimulus package

The central bank will probably double the annual pace it accumulates exchange-traded funds to ¥2 trillion in months ahead, according to the poll. The bank could boost annual bond purchases by at least ¥10 trillion, according to the survey.

Finance minister Taro Aso said last week that the next few months will be key in a decision on whether to go ahead with a further increase in the sales tax to 10% as the government tries to rein in the world’s largest public debt burden.

“Given it takes months for the effects of monetary policy to penetrate the economy, I predict easing later this month,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “It’s hard for the BoJ to achieve the same impact with stimulus again so a surprise has to come from the timing.”

Seventy-eight per cent of the economists in the poll said Abe will have to compile another stimulus package in the fiscal year starting this month to support the economy.
Kuroda’s press conference after a policy meeting usually starts at 3:30pm in Tokyo.

Kuroda said last month that Japan won’t see a repeat of the recession that followed the sales tax increase in 1997, pointing to Japan’s now-stronger financial system and an absence of a regional financial crisis that hurt the country’s exports then. Bloomberg

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