The Bank of Japan opened a two-day policy meeting Wednesday, with market watchers expecting the central bank to keep policy steady and exude economic optimism despite negative fallout from the first stage of the consumption tax hike in April.
The BOJ was set to announce Thursday that it will continue its massive buying of assets from financial institutions to flood the banking system with liquidity and drive inflation to 2 percent, sources close to the matter said.
The nine-member Policy Board, headed by BOJ Gov. Haruhiko Kuroda, was expected to maintain its basic stance on the economy after saying last month that it “continued to recover moderately,” while noting the downward pressure the tax hike has put on private demand.
Some analysts expect Kuroda to express reluctance to conduct further easing because he expects the fallout from the tax hike to be temporary.
The BOJ warned last month of weakness in exports and industrial output but also claimed that the positive cycle of economic growth it has been trying to incur is under way, helped by improvement in employment and wages.
Recent data show that industrial production recovered slightly in July but that the tax hike and the subsequent drop in consumption have kept manufacturers, particularly automakers, on edge.
Unemployment remains low and wages in some sectors are rising incrementally, but household spending has shrunk since spiking ahead of the April 1 tax hike and the workforce remains burdened by low-paid temporary and part-time workers groping for a future.
The weak data, also including a contraction in April-June gross domestic product, show that Prime Minister Shinzo Abe’s plan to revive the economy is at risk as a crucial decision approaches later this year on whether to follow through with the second stage of the consumption tax hike to 10 percent next year as scheduled by law to address Japan’s massive public debt.
The BOJ could come under government pressure to engage in more radical monetary stimulus if Abe decides to go ahead with the tax hike for October 2015.
On the other hand, the BOJ may back away from further easing if inflation rises as it promises.
The core consumer price index, which excludes volatile prices of fresh foods but does not exclude prices for energy, rose 1.3 percent in July from a year earlier after stripping out the impact on prices from the tax hike. This was in line with the BOJ’s projection that the 2 percent goal will be achieved by the fiscal year starting next April.
Private-sector economists, though, say the inflation rate may narrow from August, possibly dipping below 1 percent. Some say the BOJ will have to expand its “quantitative and qualitative” stimulus to achieve the goal.
Kuroda has acknowledged that the pace of inflation may slow but said the rate will stay above 1 percent.
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