BoJ keeps policy steady, more easing still seen at end of month

Bank of Japan (BOJ) Governor Haruhiko Kuroda gestures to a reporter during a news conference at the BOJ headquarters in Tokyo, 15 September

TOKYO (Reuters): The Bank of Japan held off on expanding stimulus on Wednesday, even as slumping exports and falling oil prices threaten its rosy projection that the economy is on track to hit the bank’s ambitious 2% inflation target next year.

But lingering fears of recession mean economists still expect the central bank to ease policy at a more crucial meeting on Oct. 30, when it is expected to cut its long-term economic and price forecasts.

BOJ Governor Haruhiko Kuroda remained bullish that the bank’s massive money-printing will eventually lift the world’s third-biggest economy decisively out of nearly two decades of deflation, but some economists were unconvinced.

“The trend of consumer rises is rising steadily,” he told a news conference after the BOJ maintained its pledge to increase base money at an annual pace of 80 trillion yen ($700 billion) through aggressive purchases of assets such as government bonds.

“There is absolutely no change to our stance that we will steadily implement quantitative and qualitative easing to achieve the 2% inflation target at the earliest possible time.”

Kuroda said he expects to hit the inflation target around the six months from next April but that this could depend on oil prices, which have slumped sharply since mid-2014.

The BOJ maintained its optimistic view that while exports and output have been hurt by slowing emerging market growth, Japan’s economy continues to recover moderately.

Prices are on track because labor shortages will push up wages and lift consumer spending, Kuroda said. Household inflation expectations remain firm and an expected boost in capital expenditure will also help prices, he said.

However, once board members submit their GDP and CPI forecasts later this month Kuroda’s optimism is likely to fade, leading to an expansion in quantitative easing, economists say.

“The BOJ will revise down its forecasts and ease again on Oct. 30,” said Takuji Aida, chief economist at Societe Generale Securities. “Kuroda has to wait until then to revise down his scenario.”

The BOJ is likely to expand its base money target to 85 trillion yen and buy more exchange-traded funds, Aida said.

Japan’s economy shrank in April-June and some analysts expect another contraction in July-September on slumping global demand and weak consumption. That would mark its fourth recession in five years.

Core consumer prices slid in August from a year earlier, the first drop since the BOJ deployed its massive stimulus program more than two years ago, casting doubt on whether heavy money printing alone can accelerate inflation to 2%.

In a semi-annual review of its forecasts on Oct. 30, the BOJ is set to slash its economic growth forecasts and push back the timing for achieving its price target, sources say.

The BOJ now expects inflation to hit 2% by around September next year, a forecast many analysts criticise as too ambitious.

A Reuters poll in early September, before the recent spate of weak data, showed most economists did not expect further easing until 2016.