TOKYO The Bank of Japan maintained its massive monetary stimulus on Tuesday on the view that growth in the economy and consumer prices remains on track, but downgraded its assessment of exports in a warning about external demand.
Governor Haruhiko Kuroda expressed confidence that the weakness in exports is temporary and stuck with the BOJ's overall assessment that the economy can continue a gradual recovery, suggesting additional easing was not imminent.
The BOJ did upgrade its view of capital expenditure and turned more optimistic about industrial production, showing more confidence in domestic demand before an increase in the sales tax scheduled for April 1.
However, this optimism is unlikely to ease concerns that domestic demand will weaken after the tax hike and that exports will not be strong enough to support growth, which could increase calls for more monetary stimulus.
"It is not an atmosphere where the BOJ will ease immediately even if it downgrades growth forecasts as core consumer prices have been hovering in a range higher than previously expected," said Junko Nishioka, chief economist at RBS Securities.
"If the yen appreciates sharply and share prices plunge due to geopolitical risks, including the Ukraine, the BOJ will have to move."
As expected, the central bank on Tuesday maintained its pledge of increasing base money, its key monetary policy gauge, at an annual pace of 60-70 trillion yen ($590-$690 billion).
The BOJ launched the stimulus last April, saying it would lift inflation to 2 percent within around two years via aggressive asset purchases as it sought to end 15 years of deflation.
The BOJ said exports had leveled off recently, which was a downgrade from its assessment last month, when the central bank said exports were on a recovery path.
Japan posted a record current account deficit in January due to consistently weak exports, undermining the BOJ's argument until now that exports would eventually pick up pace as the U.S. economy recovers.
Exports have been weak mainly due to a slowdown in Asian economies and other emerging markets, Governor Haruhiko Kuroda told reporters after the policy decision.
The closure of factories due to extremely cold weather in the United States and the celebration of the Lunar New Year in many Asian countries have also weighed on exports, he said.
Once these temporary factors subside, Japan's exports will pick up as a recovery in the United States and Europe spreads to Asia, he said. Kuroda also played down the geopolitical risks posed by Russia's military intervention in the Ukraine.
"I see no reason to adjust policy now," Kuroda said. "The economy can continue to expand above its potential growth rate."
Some economists worry that exports could remain week because of structural changes in the economy as Japanese companies have been shifting production capacity overseas.
The central bank said capital expenditure was showing clear signs of recovery, an upgrade from its assessment last month that business investment was recovering.
The BOJ also said industrial production was rising at a slightly faster pace.
SALES TAX IMPACT
Recent strength in industrial output, and signs companies are more willing to invest in factories and equipment as consumers buy more goods before the tax hike, likely encouraged optimists within the BOJ to take a more positive view of domestic demand.
The labor market is tightening, which also backs the BOJ's view that the economy will continue a gradual recovery and its 2 percent inflation target is achievable over the next 12 months or so.
Kuroda and other officials have been confident the economy can survive the short-term shock when the sales tax rate rises to 8 percent from 5 percent on April 1, but some economists worry growth could falter.
Core consumer inflation reached a five-year high of 1.3 percent in January, supporting the BOJ's view that it will stay above 1 percent and accelerate again later this year, excluding the impact of the sales tax increase. Some BOJ officials think prices are rising a tad faster than expected.
Due to differences in the way utility companies plan to implement the sales tax increase, the tax hike will first add 1.7 percentage points to the annual inflation rate in April and then 2.0 percentage points from May, Kuroda said.
A Reuters poll last month showed economists expect the BOJ to ease policy further around the middle of the year, as they say it will otherwise be difficult to meet the inflation target.
(Editing by Chris Gallagher)