The Bank of Japan said in a quarterly report Monday that the nation’s nine regional economies are still robust despite downward pressure from the April 1 consumption tax hike.
The tax hike to 8 percent from 5 percent was expected to dent household and business spending, but the central bank did not change its evaluations of the regional economies, signaling they are holding their own.
The report may reinforce the market’s view that the BOJ will leave monetary policy unchanged when the Policy Board meets from July 14 to 15. The members will review the regional assessments as well as the recently released “tankan” business sentiment survey, which indicated the slowdown from the tax hike was relatively limited.
All regions “reported that the economy continued to recover, or had been recovering moderately as a trend, while the subsequent decline in demand following the front-loaded increase prior to the tax hike had been observed,” the report said.
It cited “the fact that domestic demand had been firm, production had been on a moderate increasing trend, and the employment and income situation had been improving.”
Earlier in the day, BOJ Gov. Haruhiko Kuroda told the bank’s branch managers at a meeting that the core inflation rate, excluding volatile prices for fresh food, will float between 1.0 and 1.5 percent “for the time being,” excluding the direct effect of the tax hike.
The BOJ’s inflation target under “Abenomics” is 2 percent.
The economy “is expected to continue a moderate recovery as a trend” while being affected by the hike, Kuroda said.
The BOJ’s ultraloose monetary policy “has been exerting its intended effects,” Kuroda said, adding that the bank “will examine both the upside and downside risks to economic activity and prices, and make adjustments as appropriate.”
The BOJ has been pursuing a 2 percent inflation goal to boost the economy, purchasing massive amounts of Japanese government bonds and other financial assets from commercial banks to flood the economy with liquidity, weaken the yen and spur lending and exports while banishing prolonged deflation.
The BOJ has left its aggressive “quantitative and qualitative” easing policy unchanged since it began in April 2013, apparently taking heart from the steady rise of the core consumer price index, which excludes volatile prices for fresh food but not energy. Stripping out the impact of the tax hike, the core CPI rose around 1.5 percent in both April and May.
But many analysts, as well as the BOJ itself, forecast that the rise in inflation might slow after this summer, with some expecting it to moderate below 1 percent.
Also, given the slowdown taking place in exports amid the uncertainty surrounding the outlooks for emerging economies like China, as well as lingering concern about domestic consumption after the tax hike, the BOJ could be forced to take additional steps to achieve its price stability goal.
Last week, the results of the BOJ’s quarterly tankan survey showed that business confidence had deteriorated in the quarter through June, mostly because of the tax hike.
However, many observers said that the downward pressure was less than expected and that it is less likely the economy will significantly slow.