Business / Economy

BOJ keeps policy steady but warns of weak production


The Bank of Japan on Tuesday kept its monetary policy steady, saying the economy is recovering despite the jolt it suffered from the consumption tax hike in April, but the bank downgraded its assessment of industrial output.

The decision came as market participants believe the BOJ will face difficulty achieving its 2 percent inflation goal within the stated time frame of about two years following the start of aggressive easing in April 2013.

The BOJ will release its latest growth and inflation forecasts later this month.

“Japan’s economy has continued to recover moderately, as a trend,” the BOJ said in a statement, sticking to an earlier overall assessment while adding that “some weakness, particularly on the production side, has been observed.”

The nation’s industrial output has been recovering only slowly because the consumption tax increase has weighed on private consumption. Auto sales have slumped.

“Industrial production has recently been showing some weakness, due in part to inventory adjustments,” the BOJ said, lowering its evaluation from September when it said production “has recently shown some weakness, although it has continued to increase moderately, as a trend.”

The BOJ statement came after a two-day Policy Board meeting in which the nine members voted unanimously to maintain massive asset purchases from financial institutions to double the base money provided to the economy.

“Exports have shown some weakness,” while private consumption “has remained resilient as a trend with the employment and income situation improving steadily,” the statement said.

“Business sentiment has generally stayed at a favorable level, although its improvement has paused” under the impact of the sales tax rise, it said, almost shrugging off the relatively poor results in the “tankan” business sentiment survey released last week.

Looking ahead, the central bank said that “Japan’s economy is expected to continue its moderate recovery trend,” while the negative effects of the tax hike “are expected to wane gradually.”

The BOJ briefly suspended the policy meeting Tuesday when Gov. Haruhiko Kuroda went to the Diet to answer questions from an opposition lawmaker — the first such development in 16 years.

Kuroda told a Diet committee he believes the recent sharp fall of the yen is “positive for the economy as a whole,” apparently playing down the argument that the weaker currency has hurt businesses as well as the standard of living by making imports more expensive.

Recent weak data, most notably industrial output and consumer spending, support the view that the BOJ could be forced to take additional steps to revive the economy and attain the inflation target of 2 percent.

But at the same time, the bank has also considered the effective reduction in wages that resulted from the tax increase. There is widespread concern that the BOJ may only end up causing a greater burden for households by single-mindedly pursuing higher inflation.

The latest tankan showed that both large and smaller firms have been slow to regain confidence, as the tax hike and unstable weather both served to dampen consumer spending while the yen’s depreciation made energy and other imports more expensive.

The quarterly survey also said some 10,000 companies polled last month forecast an average annual consumer price inflation rate of 1.5 percent in one year, unchanged from June and March and well below the BOJ’s goal.

The BOJ has stated that it expects to hit its inflation goal “about two years” after the introduction of “quantitative and qualitative easing” in April 2013.

Although the bank has not specifically forecast when it expects to reach that goal, many market participants believe the deadline has been extended to next spring — and that any prospect of missing the target at that time would lead to pressure from lawmakers on the BOJ to implement additional easing.

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