Bank of Japan upbeat before sales tax rise

PUBLISHED : Thursday, 23 January, 2014, 1:19am
UPDATED : Thursday, 23 January, 2014, 1:19am

The Bank of Japan kept monetary policy steady and maintained its upbeat inflation forecasts, suggesting no imminent monetary easing is on the horizon as the country's economic recovery broadens.

The weak yen, which inflates import costs, has helped Japan pass the halfway mark toward its 2 per cent inflation target with prices in November up 1.2 per cent from a year before.

While market suspicion on whether inflation will accelerate further runs deep, recent price gains and signs of economic strength have made central bankers more certain Japan is on track to meet their price target.

The bank, which announced a huge stimulus in early 2013, prefers not to ease again unless evidence emerges that a sales tax rise planned for April causes far more damage than expected.

As widely expected, the central bank maintained its commitment of increasing base money at an annual pace of 60 trillion (HK$4.4 trillion) to 70 trillion yen via aggressive asset purchases.

In a quarterly review the bank maintained its forecast that core consumer inflation will hit 1.3 per cent in the fiscal year beginning in April and accelerate to 1.9 per cent the following year.

"Japan's economy is continuing to recover moderately with consumers recently front-loading spending ahead of the sales tax hike," the central bank said.

Board member Sayuri Shirai made a rare dissent to part of the bank's economic assessment, saying that the slow pace of improvement in job and income conditions must be added as risks to the outlook.

The economy is likely to boom until March as consumers rush to beat the sales tax rise, and many analysts take the bank's view that the pain from the higher tax will be temporary.

But some fret the tax rise may hit consumption harder than expected. Others doubt consumer inflation will accelerate much from here, as prices will soon lose support from the weak yen.

Governor Haruhiko Kuroda has repeatedly said the bank will act "without hesitation" if such risks threaten the achievement of its price target.

"The effect from the weak yen will gradually wane after spring, slowing the pace of consumer price rises," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance. "It's obvious the economy will slow after the sales tax hike."