UPDATE 3-BOJ says inflation to stay above 1 pct despite cut in GDP forecast
* BOJ keeps policy steady, as widely expected * Gov Kuroda says 'virtual cycle' in place * BOJ cuts GDP forecast slightly for current fiscal year * Says impact of tax rise seen subsiding gradually * Board maintains its inflation projections (Adds more Kuroda quotes, details) By Leika Kihara and Stanley White TOKYO, July 15 (Reuters) - The Bank of Japan's governor voiced confidence on Tuesday that inflation would hold above 1 percent even when a boost from energy costs fades, attempting to convince sceptics the economy was recovering and there was no threat of a return to deflation. Haruhiko Kuroda, once Japan's top currency diplomat, also sought to keep the yen in check, warning that sharp gains were unwarranted with the BOJ maintaining its massive stimulus while its U.S. counterpart started to think of interest rate rises. In a news conference after a widely expected decision to keep monetary policy steady, Kuroda said the world's third-largest economy would ride out the effects of a sales tax rise in April and inflation would head towards 2 percent next year. "We're clearly seeing a shift in trend where companies, instead of cutting prices, are trying to heighten the quality of their goods to sell them at higher prices," he said. "I don't think there is a possibility that consumer inflation will fall below 1 percent." The BOJ believes that, after hitting 1.4 percent in the year to May, inflation will slow in coming months due largely to the base effect of last year's spike in energy costs, before accelerating again toward its 2 percent target. Many market participants doubt prices will rise that much and some have speculated that if inflation slides below 1 percent in coming months, the BOJ could be forced into easing policy further to ensure the target is met. Kuroda's remarks may cause the market to scale back already shrinking expectations of further easing this year. "I think the chance of additional easing is small as slack in the economy is gone," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities, agreeing with the BOJ's view that inflation would probably not fall below 1 percent. "However, Kuroda's comments could reduce room for manoeuvre as the BOJ would be compelled by the market to react if consumer price inflation did fall below 1 percent." The BOJ maintained its policy framework, under which it has pledged to increase base money by 60-70 trillion yen ($590-$690 billion) per year through aggressive asset purchases, largely of Japanese government bonds. In a quarterly review of its long-term forecasts, the central bank cut its economic growth projection slightly for this fiscal year as exports remain weak and household spending tumbled more than expected after a sales tax increase in April. But the BOJ's nine-member board maintained its inflation projections and stuck to the view the economy would continue recovering moderately as the impact of the tax rise fades. "The downturn in spending after the sales tax hike is roughly within expectations," Kuroda said. "Domestic demand, including capital expenditure, remains firm as a trend. A virtuous cycle in economic activity clearly remains in place." OPTIMISTIC VIEW INTACT The BOJ has left policy unchanged since unleashing an intense burst of stimulus in April last year, when it pledged to pull Japan out of chronic deflation and push up consumer price inflation to 2 percent in roughly two years. But a recent slew of weak data has cast doubt on the BOJ's scenario of an investment-driven economic recovery. Household spending and machinery orders, a leading indicator of capital spending, both tumbled in May, underscoring the fragile state of a recovery that has been driven by domestic demand as exports fail to pick up. The BOJ trimmed its economic growth forecast for the fiscal year to March 2015 to 1.0 percent from the 1.1 percent projected three months ago. That is still higher than the 0.9 percent rise forecast in a Reuters poll. But it left unchanged its growth projections for fiscal 2015 and 2016, as well as its price forecasts that see consumer price inflation hitting 1.9 percent in the next fiscal year. Kuroda acknowledged that a slump in exports was lasting longer than expected, although he saw shipments picking up as global growth recovers. He also said the differing monetary policy trajectories of Japan and the United States meant the yen was unlikely to rise much against the dollar. A weaker yen gives Japanese exporters a competitive advantage in overseas markets. "In the United States, monetary policy isn't heading towards further easing and is rather heading towards a taper (of asset purchases) and an interest rate hike," he said. "On the other hand, in Japan, we're only halfway through in meeting the 2 percent price target and we will maintain our quantitative easing programme until the price target is stably met. If that's the case, I see no reason for the yen to strengthen against the dollar." ($1 = 101.3500 Japanese Yen) (Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by Kim Coghill and Alan Raybould)
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