The Bank of Japan has maintained its record easing after a United States Federal Reserve decision this week to taper its own quantitative easing policy helped weaken the yen to a five-year low against the dollar.
Bank governor Haruhiko Kuroda's board kept its pledge to expand the monetary base by an annual 60 trillion yen (HK$4.47 trillion) to 70 trillion yen yesterday after a two-day meeting in Tokyo. The decision was in line with economists' forecasts.
Kuroda's push for 2 per cent inflation underscores the difference in policy direction between the bank of Japan and the Fed, which could end its bond-purchase programme next year.
The yen's 17 per cent slide against the dollar this year is fuelling price gains and boosting exporters' profits, aiding Japanese Prime Minister Shinzo Abe's bid to end 15 years of deflation.
"The wind is at the Bank of Japan's back," Hideki Matsumura, senior economist at Japan Research Institute in Tokyo, said before yesterday's decision. "The Fed's action confirms that the yen will stay on a weakening trend and a US recovery will help lift Japan's exports."
The yen was trading at 104.43 to the dollar in late afternoon trade in Tokyo yesterday, after earlier reaching 104.59, its weakest level since 2008.
Inflation expectations appeared to be rising, with gains in core consumer prices at about 1 per cent, the bank said after the meeting.
The central bank said yesterday the year-on-year rate of increase in core CPI was likely to rise "for the time being", dropping the word "gradually" that it used last month.
Japan's economy was expected to continue a moderate recovery, while also being affected by growth in demand before a sales tax increase in April and a subsequent decline after the levy rises, it said.
Bank of Japan officials see significant scope to boost government bond purchases if needed to achieve the price target, said people familiar with the discussions.
On Wednesday, the Fed announced plans to trim its monthly bond purchases to US$75 billion from US$85 billion next month.
Economists say it is likely to make cuts in US$10 billion increments over the next seven meetings before ending the programme in December next year.
Abe's monetary stimulus and fiscal spending have helped boost corporate profits. Sentiment among large Japanese manufacturers increased to a six-year high this month, the bank's tankan survey showed this week.
Still, companies are cautious about investment or increasing workers' wages. Salaries extended their longest tumble since 2010 to 17 months in October even as companies' cash holdings reached a record high last quarter.
Abe was holding a fifth meeting with trade union and business leaders yesterday as part of attempts to build a consensus on the need for higher wages.