TOKYO • The Bank of Japan (BOJ) has refrained from boosting stimulus even after the economy shrank last quarter, betting that a resumption in growth will be enough to rekindle inflation.
The move by BOJ governor Haruhiko Kuroda and his colleagues yesterday leaves the onus on Prime Minister Shinzo Abe's government to compile a stimulus package to boost what evidence indicates is a lacklustre recovery in the second half of the year so far.
Mr Kuroda repeatedly told reporters yesterday that the bank sees a gradual recovery continuing in the economy, while also saying the bank would not hesitate to ease if there was some danger of prices not rising to its target.
With the BOJ's inflation gauge at zero, some officials at the bank see a growing chance of another delay in reaching their 2 per cent price target. Economists from Goldman Sachs Group and Citigroup are among those who project a boost in stimulus on Oct 30.
"If the downside risks worsen, the BOJ will need to take action," said Nomura Holdings economist Yasuhiro Takahashi, who forecasts further stimulus in April. "The BOJ had been optimistic about the outlook for Japan's economy but in today's statement it lowered its view on exports and production."
The central bank will keep increasing the monetary base at an annual pace of 80 trillion yen (S$938 billion), it said in a statement, as forecast by 33 of 35 economists surveyed by Bloomberg. The other two predicted a boost.
The yen strengthened 0.6 per cent to 119.66 against the US dollar at 6.34pm in Singapore, while it was trading 0.16 per cent higher against the Singapore dollar at 85.33. The Topix stock index gave up earlier gains to close almost unchanged for the day.
The currency has weakened almost 9 per cent since the BOJ last expanded on its programme in October 2014 while the stock gauge has climbed 14 per cent.
Production, household spending and orders for machinery all fell unexpectedly in July, highlighting weakness after gross domestic product contracted last quarter.
The economy will probably return to growth in the July- September period, Mr Kuroda said at a press conference after the policy decision.
While he has signalled the possibility that the BOJ may lower its inflation outlook because of the drop in oil prices, he said yesterday that inflation would accelerate to the 2 per cent goal around the six months to September 2016.
Eleven economists have predicted the expansion of stimulus on Oct 30, when the BOJ releases its economic and inflation outlook.
That meeting would be a "good opportunity" to add stimulus, ruling party lawmaker Kozo Yamamoto said last week. He said the BOJ should expand its easing plan by at least 10 trillion yen.
The central bank has been buying government bonds and assets linked to stocks and real estate to pump cash into the economy.
With the BOJ having purchased 79 per cent of the targeted amount of exchange traded funds for this year, it may need to add to its firepower.