TOKYO The Bank of Japan, unfazed by the latest emerging market rout, is set to stand pat on monetary policy next week and stick to its rosy economic assessment, signaling that any additional monetary stimulus may be some time away.
With markets calming down after the recent turbulence and pessimism over the U.S. and Chinese economies easing, the Japanese central bank sees no need to alter its forecast that exports will emerge from a soft patch in coming months as global demand picks up.
The BOJ is hardly complacent. With the global recovery still fragile, Japanese firms are cautious about boosting wages and capital expenditure enough to make up for a slump in household spending which is expected after a sales tax hike in April.
Still, it is in no mood to tap its depleted policy arsenal unless more evidence suggests its 2 percent inflation target cannot be met without additional stimulus, analysts say.
Markets are focusing on what Governor Haruhiko Kuroda will say in his post-meeting briefing about the recent market turmoil and the fallout for Japan's economic outlook.
"The BOJ's message will probably be a positive one, emphasizing that global economic fundamentals are strong despite the market turbulence," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo.
"It's times like this when policymakers must reassure markets everything is on track. That's what Kuroda will do."
The BOJ is widely expected to maintain its commitment of increasing base money, its key policy gauge, at an annual pace of 60-70 trillion yen ($585-$683 billion).
The central bank may also extend special loan facilities, cobbled together between 2010 and 2012 to drive funds through the banking sector to borrowers, beyond their expiry date of March by at least a year.
The BOJ launched an intense burst of stimulus last April, when it pledged to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases in a country mired in deflation for 15 years.
Some Japanese policymakers have worried that the recent market turbulence, which boosted the safe-haven yen and drove down Tokyo share prices, could undermine the positive momentum generated by the stimulus.
They were thus relieved to see markets stabilize, which allowed them to conclude that the turbulence was a temporary correction with limited impact on exports, at least for now.
The central bank is likely to maintain its assessment that Japan's economy will continue a moderate recovery and make steady progress toward its 2 percent price target.
Still, success in meeting the target is hardly assured.
Sluggish demand in Asia has kept exports disappointingly weak despite the weak yen, while a leading indicator of capital spending suffered a record fall in December.
Core consumer inflation has exceeded 1 percent, though analysts doubt price growth will accelerate further as the effect of the weak yen, which inflates import costs, starts to fade.
Indeed, wholesale inflation slowed for the second straight month in January with the yen-based import price rising 12.7 percent from a year earlier, smaller than a 17.6 percent gain in December, data showed on Thursday.
Policymakers see spring wage negotiations as key in judging whether prices will rise further. They also want to scrutinize upcoming data to gauge the impact of the sales tax hike.
"The BOJ's new policy framework has so far been quite successful. Inflation has risen above 1 percent and just as important, price rises have become more broad-based," Jerry Schiff, deputy director of the International Monetary Fund's Asia and Pacific Deparment, told reporters on Wednesday.
"As long as inflation and inflation expectations continue to rise toward 2 percent, we don't see the need for further easing" by the BOJ, he said.
($1 = 102.5350 Japanese yen)
(Editing by Kim Coghill)