TOKYO • The Bank of Japan refrained from bolstering its record monetary stimulus as policymakers gauge the impact of the negative interest-rate strategy they adopted in January.
However, the central bank appeared to back-pedal on its recent radical shift to negative interest rates, highlighting the dilemma the BOJ faces as it struggles to respond to renewed signs of economic weakness with dwindling policy options.
Governor Haruhiko Kuroda and his board kept the target for increasing the monetary base unchanged, and left their benchmark rate at minus 0.1 per cent.
The central bank said it will add easing if necessary while the language in its statement yesterday indicates a downgrade in its assessment of the economy. Tokyo shares closed down 0.68 per cent after the announcement, while the yen strengthened against its major peers.
"You can see from the statement the agony for the BOJ in the gap between its hopes and the realities in the economy and prices," said Barclays economist Kyohei Morita.
"Japanese inflation is at a level where even the BOJ has to admit its weakness. It is leaning towards additional stimulus, and I expect it to be in July," he added.
Six weeks after it shocked global financial markets and alarmed the Japanese public by moving to negative rates, the BOJ dropped a reference in a statement after a policy meeting that it will cut negative rates even more deeply if needed.
With the BOJ far from its 2 per cent inflation goal and with growth stalling, the stakes are rising for Mr Kuroda, as household and corporate sentiments wane and investors question whether monetary policy is reaching its limits.
The BOJ said it "will examine risks to economic activity and prices and take additional easing measures in terms of three dimensions - quantity, quality, and the interest rate - if it is judged necessary for achieving the price stability target".
Since the central bank's last meeting on Jan 29, economic data has shown little momentum for a recovery, from a contraction in gross domestic product registered in the final quarter of last year.
The BOJ's key consumer-price measure did not budge in January, and sentiment among consumers and merchants has slumped.
The central bank conceded that exports and production have been sluggish, while maintaining its view that there has been improvement in employment and income conditions. It noted that inflation expectations have weakened recently.
Nomura Holdings economist Masaki Kuwahara said the BOJ has effectively cut its economic assessment. "The downgrade may mean that the likelihood of further monetary easing increases," Mr Kuwahara said.
The yen rose to 113.05 to the dollar as of 4.59pm in Tokyo, about 6 per cent stronger than it was at the start of the year - an appreciation that has undercut the competitive advantage that previous BOJ easing had won.
The currency's gains are a risk to growth in corporate profits, especially among Japan's exporters, and inflation, because of lower import costs. Japan's Topix index lost 0.6 per cent while the MSCI Asia-Pacific gauge fell 0.8 per cent.