• Reuters, Bloomberg

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The Bank of Japan on Tuesday kept monetary policy steady and nudged up its economic growth forecasts as the government’s stimulus package and receding pessimism over the global outlook took some pressure off the central bank to alter course.

The BOJ also signaled cautious optimism over the global economy after the United States and China agreed on a preliminary deal to defuse their bitter trade war, saying that risks surrounding the outlook have “subsided somewhat.”

As widely expected, the BOJ kept its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent.

It also maintained a guidance that commits to keeping rates at current low levels, or even to cut them, until risks keeping it from achieving its 2 percent inflation goal subside.

“Given that the yen has stabilized and other major central banks are pausing on policy, there’s no reason for the BOJ to take action for the time being,” said Toru Suehiro, senior market economist at Mizuho Securities.

The BOJ targets rates in guiding policy under a framework dubbed yield curve control. It also continues to buy huge amounts of government bonds and risky assets in an effort to fire up inflation to its elusive target.

The price outlook “has hardly changed from the previous view,” BOJ Gov. Haruhiko Kuroda told reporters.

The impact of faster growth on prices isn’t showing up clearly in the forecast period, he said, but should theoretically be felt after a “time lag.”

In a quarterly review of its forecasts, the BOJ raised its growth projection for the fiscal year beginning in April to 0.9 percent from an estimate of 0.7 percent growth made in October, helped by a boost from the government’s fiscal stimulus package.

The bank also upgraded its growth estimate for fiscal 2021 but largely maintained its price forecasts that show inflation missing its 2 percent target through early 2022.

“Japan’s economy is likely to continue expanding moderately as a trend” as the impact of slowing global growth on domestic demand will be limited, the BOJ said in its quarterly report.

“While risks surrounding overseas economies have subsided somewhat, they remain big,” it said, underscoring the BOJ’s resolve to maintain its ultraloose policy.

The world’s third-biggest economy ground to a near halt in July-September and is likely to have contracted in the final quarter of last year as the U.S.-China trade war hurt exports.

BOJ officials hope that the government’s ¥13.2 trillion fiscal package and robust capital spending will offset the hit from soft global demand and supply chain disruptions from last year’s typhoons that continue to weigh on factory output.

The International Monetary Fund on Monday trimmed its 2020 global growth forecasts on sharper than expected slowdowns in emerging markets but said the U.S.-China deal was another sign that manufacturing activity may soon bottom out.

Pessimists in the BOJ, however, fret that weak global auto demand and the drag on consumption from the October consumption tax hike from 8 percent to 10 percent may mean only a modest rebound in January-March growth.

While the tax increase is weighing on domestic demand, the hit to consumption is likely to be smaller than when the tax was raised to 8 percent from 5 percent in 2014, the BOJ said in the report.

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