The Bank of Japan on Monday began a two-day policy meeting to review its growth and inflation forecasts for moderate economic expansion despite the April consumption tax hike.
Financial market participants also expect the Policy Board to maintain the BOJ’s ultraloose monetary policy to encourage growth, including purchasing huge amounts of Japanese government bonds and other financial assets from banks to provide ample liquidity and raise the inflation rate to 2 percent.
In April, the board members projected an average rise of 1.1 to 1.5 percent in real gross domestic product between fiscal 2014 and 2016.
The bank is expected to maintain or slightly lower the estimates amid the impact of the April 1 consumption tax hike, which had been feared to slow household spending and business investment.
The BOJ will likely stick to its earlier forecasts on inflation as measured by the core consumer price index, which excludes fresh food — plus 1.3 percent for the current fiscal year ending next March, 1.9 percent for fiscal 2015 and 2.1 percent the following year. The numbers exclude the direct effects of the tax rise.
The BOJ aims to achieve the 2 percent inflation goal within around two years since the introduction of aggressive monetary easing in April 2013 under Gov. Haruhiko Kuroda, who has been cooperating with the administration of Prime Minister Shinzo Abe to beat chronic deflation.
The latest forecasts by the BOJ come as its recent surveys added to the view in markets that the economy is resilient in the face of the sales tax increase, the first in 17 years. The adminsitration plans a further increase in the tax in October 2015, depending on the economic environment.
The BOJ’s latest “tankan” business sentiment survey, released earlier this month, suggested a recovery in large manufacturers’ confidence will take place in the three months through September, although it sank for the April-June quarter on the higher tax rate, which weakened domestic demand.
In addition, the BOJ released a quarterly report last week on the regional economic situation that also signaled healthy business activities throughout the country, with the bank’s branch managers indicating that headwinds from the tax rise have been limited.
“The effect of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike is becoming eased,” the report said.
But the BOJ has also recognized that downside risks remain for its main scenario. In the absence of stable wage hikes, the tax increase will end up harming consumer sentiment, the bank’s policymakers have said.
Analysts have warned that the pace of inflation the BOJ is aiming to achieve is rapid enough to negatively impact the economy.