TOKYO • The Bank of Japan (BOJ) offered its most optimistic assessment of the economy in nine years at its policy meeting yesterday, and described recent weakness in inflation as temporary, signalling confidence that a sustained recovery will help achieve its ambitious price target.
The BOJ kept its policy unchanged, as expected, but Governor Haruhiko Kuroda conceded that public perceptions of future price rises remained subdued, suggesting the central bank will significantly lag behind its United States and European peers in exiting its massive stimulus programme.
The optimism about the economy and caution over the inflation outlook show the BOJ prefers to maintain the status quo on monetary policy for the time being, analysts say. "The inflation and growth projections, as well as the upgrade of its economic assessment, were all in line with market forecasts, so there was no surprise at this meeting," said Mr Yasunari Ueno, chief market economist at Mizuho Securities. "As long as the economy maintains its momentum, the BOJ will likely stand pat, at least until next spring, when Mr Kuroda serves out his term."
The BOJ maintained its short-term interest rate target at minus 0.1 per cent and a pledge to guide 10-year government bond yields around zero per cent.
It also kept intact a loose pledge to buy government bonds so its holdings increase at an annual pace of 80 trillion yen (S$1 billion), defying market speculation that the guidance could be removed to pave the way for an eventual withdrawal of stimulus.
"Japan's economy has been turning towards a moderate expansion," the BOJ said in a quarterly review of its long-term economic and price projections. Compared with the previous month's view, it was "improving moderately as a trend".
It was the first time since March 2008 that the BOJ used the word "expansion" to describe the state of the economy, signalling its conviction that the recovery was gaining momentum and that it saw no need for additional stimulus.
Despite the rosy economic view, Mr Kuroda reminded markets that the central bank is nowhere near an exit from its massive stimulus.
"We expect inflation to accelerate towards 2 per cent but, currently, inflation is around zero per cent," Mr Kuroda told reporters after the policy meeting. "Talking about a specific exit strategy now would cause undue confusion in markets," he said.
Japan's economy has shown signs of life, as exports rose the most in over two years in March and manufacturers' confidence hit the highest level since the global financial crisis a decade ago.
But core consumer prices for February rose just 0.2 per cent from a year earlier, as weak private consumption has discouraged companies from raising prices.
While a pioneer in deploying unorthodox stimulus, the BOJ is likely to lag behind its peers in withdrawing monetary support.