11 July 2013 06:53

BOJ Upgrades Assessment Of Economy


TOKYO--Using its most optimistic language in more than two years, the Bank of Japan upgraded its assessment of the economy Thursday, saying it is starting to "recover moderately."

At the end of a two-day policy board meeting, the central bank left its policy unchanged and stuck to its optimistic outlook for achieving its "2% inflation in two years" target, reflecting its confidence in the drastic easing program the bank launched in April to reverse 15 years of falling prices.

The bank's decision to raise its economic view--the seventh straight month of upgrades--was widely expected. "It should push back expectations for the bank to take additional easing," said Noriatsu Tanji, a bond strategist at Barclays Securities.

But speculation for fresh easing measures may surface in the autumn or later, as the central bank slightly lowered its projected inflation figures for the current and following fiscal years and also cut its growth forecast for the current fiscal and subsequent two fiscal years.

"The probability of additional monetary easing would strengthen if they continue to revise down their inflation forecast," said Yoshimasa Maruyama, a senior economist at the Itochu Economic Research Institute. Given the considerable gap between the BOJ's price outlook and that of private-sector analysts, "the door is open for further downward revisions," he said.

The BOJ's goal of hitting its 2% inflation target in around two years is generally seen as too ambitious outside the central bank. A poll of 41 economists by the Japan Center for Economic Research showed an average forecast for a 1.0% rise in Japan's core CPI in fiscal 2015. Only one of the economists polled in the center's ESP Forecast Survey for June said that the BOJ can achieve 2% inflation in two years. Japan's nationwide core CPI was flat in May.

"I still think it's hard to achieve the CPI forecast of a 1.9% increase," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

Still, little more than three months since BOJ Gov. Haruhiko Kuroda orchestrated a dramatic shift in the bank's policy, signs are growing that Japan's economic recovery is gaining momentum as exports recover on the yen's weakness, consumers boost spending, and deflationary pressure gradually wanes.

In its monthly economic assessment, the BOJ said the economy is "starting to recover moderately," raising its views on exports, business investment and industrial output. The BOJ last described the economy as recovering in January 2011. In the previous month, the BOJ said the economy "has been picking up."

At the policy gathering, the BOJ also conducted an interim review of its semi-annual growth and inflation projections covering a three-year period from this April.

The board members' median forecast tipped Japan's core consumer price index to rise 1.9% in the Japanese fiscal year starting April 2015, unchanged from April, when the bank released its first semi-annual forecast report under Mr. Kuroda. The forecasts factor out the impact of a planned doubling of Japan's 5% sales tax over 2014-2015.

But the BOJ now sees 0.6% inflation for the current fiscal year, down from the initial 0.7% increase forecast. For the next fiscal year, the bank now predicts 1.3% inflation compared with the 1.4% price growth previously predicted.

On Japan's growth outlook, the BOJ sees the economy expanding 2.8% this fiscal year, down from the previous forecast of 2.9% growth. It expects 1.3% growth for fiscal 2014, down from the previous 1.4% rise. For fiscal 2015, the BOJ forecasts a 1.5% increase, down from a 1.6% gain.

The BOJ's policy board decided unanimously to maintain its key policy of boosting Japan's monetary base by Y60-Y70 trillion per year, mostly through aggressive purchases of government bonds. The result was just as expected by 12 analysts polled by Dow Jones Newswires.

Takahide Kiuchi, formerly an economist at Nomura Securities, proposed for a third straight month that the central bank's inflation commitment be made more flexible in a bid to ensure stability in long-term interest rates that turned more volatile after April's policy change.

Mr. Kiuchi urged the rest of the board to characterize the 2% inflation target as something to be implemented in "the medium to long term," and designate the current easing policy as "as an intensive measure with a timeframe of about two years." His proposal was voted down 8-1.

--Kosaku Narioka and Eleanor Warnock contributed to this article.

Write to Takashi Nakamichi at takashi.nakamichi@dowjones.com and Tatsuo Ito at tatsuo.ito@dowjones.com


Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

July 11, 2013 01:35 ET (05:35 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.




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