The Bank of Japan keep its huge financial stimulus on Tuesday on the idea that development in the economy and consumer financial worth stays on track, but bring down its evaluation of exports in a warning about external demand.
Governor Haruhiko Kuroda asserts his confidence that the decline in exports is not permanent and stuck with the BOJ's overall evaluation that the economy can stay with a gradual recovery, indicating extra easing was not imminent.
The BOJ did boost its idea of capital expenditure and turned more positive about industrial production, displaying more confidence in domestic demand before a hike in the sales tax scheduled for April 1.
However, this optimism is unlikely to ease concerns that domestic demand will slump after the tax increase and that exports will not be stable enough to aid the said development, which could boosts calls for more financial stimulus.
"It is not an atmosphere where the BOJ will ease immediately even if it downgrades growth forecasts as core consumer prices have been hovering in a range higher than previously expected," said Junko Nishioka, chief economist at RBS Securities.
"If the yen appreciates sharply and share prices plunge due to geopolitical risks, including the Ukraine, the BOJ will have to move."
As anticipated, the central bank on Tuesday stayed its commitment of boosting base money, its key financial policy gauge, at a yearly pace of 60-70 trillion yen ($590-$690 billion).
The BOJ started the stimulus last April, stating that it would increase inflation to 2 percent within around two years by means of aggressive asset buys as it sought to end 15 years of deflation.
Exports, Capex
The Bank of Japan stated that exports had currently leveled off, which was a decline from its evaluation last month, when the central bank said exports were on its way of recovery.
Japan logged a record current account deficit in January due to frequently weak exports, undermining the BOJ's argument until now that exports would emerge in the future as the U.S. economy bounces back.
Exports have been decline mainly because of a slowdown in Asian economies and other emerging markets, Governor Haruhiko Kuroda told reporters after the policy decision.
The closure of factories is because of the extremely cold weather in the United States and the celebration of the Lunar New Year in many Asian countries have also weighed on exports, he said.
Once these impermanent determinants subside, Japan's exports will pick up as a recovery in the United States and Europe spreads to Asia, he said. Kuroda also played down the geopolitical risks posed by Russia's military intervention in the Ukraine.
"I see no reason to adjust policy now," Kuroda said. "The economy can continue to expand above its potential growth rate."
Some economists fears that exports could remain weak because of structural alterations in the economy as Japanese firms have been shifting production capacity overseas.
The central bank said capital expenditure was showing clear indication of rehabilitation, a development from its evaluation last month that business investment was recovering.
The Bank of Japan also stated that industrial production was surging at a slightly faster pace.
Sales Tax Impact
Recent strength in industrial output, and indication firms are more willing to invest in factories and equipment as consumers purchase more items before the tax hike, likely encouraged optimists within the BOJ to take an upbeat point of view of domestic demand.
The labor market is tightening, which also supports the BOJ's idea that the economy will continue a gradual recovery and its 2 percent inflation target is reachable over the next 12 months or so.
Kuroda and other officials have been confident the economy can survive the short-term shock when the sales tax rate hikes to 8 percent from 5 percent on April 1, but some economists worry growth could falter.
Core consumer inflation touched a five-year high of 1.3 percent in January, backing the BOJ's idea that it will stay above 1 percent and surge again later this year, excluding the effect of the sales tax hike. Some BOJ officials think financial values are soaring a tad faster than anticipated.
Due to differences in the way utility firms plan to implement the sales tax hike, the tax increase will first add 1.7 percentage points to the yearly inflation rate in April and then 2.0 percentage points from May, Kuroda said.
