Governor Haruhiko Kuroda voiced confidence that Japan is on track
to meet the bank's 2 percent price target, stressing that the
economy will emerge from a temporary slowdown caused by last month's
sales tax hike around summer as wages and jobs rise.
The upbeat comments came after the BOJ revised up its assessment on
capital expenditure, long a soft spot in the economy, and removed a
reference that Japan was in deflation for the first time since it
deployed a massive stimulus program last April.
"Our quantitative easing policy is exerting its intended effects,"
Kuroda told a news conference, adding that household spending will
remain firm despite the pain from the tax hike.
"Most of the wage negotiations have concluded, which shows that not
only big firms but smaller firms are raising wages including regular
pay. Improvements in job market conditions are continuing."
The yen rose to a 3-1/2 month high against the dollar and the euro
after Kuroda's rosy projections on the outlook, which gave no hint
of further monetary easing in the near term.
"From today's comments, I feel that the BOJ is very confident," said
Takuji Aida, chief economist at Societe Generale Securities in
"We cannot expect any easing this year, but next year the BOJ will
be able to confirm that the actual trend of consumer prices is
weaker than expected and they will have to ease."
As widely expected, the BOJ maintained its monetary policy framework
put in place last April, under which it pledges to increase base
money by 60-70 trillion yen ($593-$691 billion) per year via
aggressive asset purchases, largely of Japanese government bonds
In a statement issued after the decision, the BOJ removed a phrase
describing Japan as being in deflation, underscoring its confidence
about meeting its price target without additional stimulus.
Kuroda sounded unfazed by recent rises in the yen that were hurting
Japanese stock prices, saying he saw no reason for the currency to
keep rising as the BOJ maintains its ultra-loose policy even as the
Federal Reserve tapers its asset purchases.
Some market players, however, took Kuroda's bullish comments as more
a strategy to keep the positive psychology alive, since his stimulus
program relies heavily on sentiment.
"I think they want to keep maintaining the inflation expectations
and the growth expectations so that the Japanese economy will not
lose momentum," said Tadashi Matsukawa, head of Japan fixed income
at PineBridge Investments.
"He just continued to be hawkish, and I think the difference between
the market economists and Kuroda remain wide."
Japan's economy clocked its fastest pace of growth in more than two
years in the first quarter as consumer spending jumped and business
investment turned surprisingly strong ahead of a sales tax hike last
month to 8 percent from 5 percent.
Some economists and politicians have argued the tax hike could dent
the success achieved so far under premier Shinzo Abe through
aggressive monetary easing and big fiscal spending.
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But there is growing evidence that any damage will be limited. A
Reuters survey showed companies expect sales to bounce back and are
more willing to raise wages.
Businesses also raised machinery
orders by the most ever in March, underscoring the BOJ's view that
firms, many of which saw profits rise thanks to a weak yen and
robust domestic demand, will finally ramp up spending to replace old
With consumer inflation having exceeded 1 percent, some academics
feel the central bank should start considering how to exit its
"They should be talking about tapering at a minimum, and they should
begin preparing financial markets for a regime after 2 percent, a
shift from stimulating aggregate demand to stimulating aggregate
supply," Dale W. Jorgenson, professor of economics at Harvard
University, told Reuters on Wednesday.
Many mainstream Japanese economists, however, agree with the BOJ
that talking about an exit now is premature with the recovery still
fragile and bound with uncertainty.
For one, exports, which hold the key to whether Japan can sustain
its recovery, have failed to pick up to the disappointment of the
BOJ, which kept its view unchanged to say shipments have recently
"leveled off more or less."
Exports rose 5.1 percent in the year to April, trade data showed on
Wednesday, exceeding a median market forecast and a 1.8 percent
increase in March. But they rose a meager 0.6 percent in April from
the previous month on a seasonally adjusted basis.
Analysts say the BOJ may act if the trade performance falls short -
a side effect of many firms moving production facilities offshore to
escape years of the yen's strength.
Private-sector economists also remain deeply skeptical about the
BOJ's rosy projection on prices, arguing that consumer inflation
won't accelerate as quickly as the central bank expects in a country
long mired in deflation.
($1 = 101.3450 Japanese Yen)
(Additional reporting by Stanley White, Kaori Kaneko and Lisa
Twaronite; Editing by Kim Coghill)
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