UPDATE 3-BOJ says inflation to stay above 1 pct despite cut in GDP forecast

Tue Jul 15, 2014 5:57am EDT

* 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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