TOKYO--The Bank of Japan on Thursday kept its policy on hold and
stuck to its optimistic economic assessment despite a dramatic
slowdown in economic activity after the government raised the sales
tax in April.
The Japanese economy is veering further away from the central
bank's rosy growth projections as additional tax burdens worth some
$80 billion send household spending plummeting, raising doubts over
Prime Minister Shinzo Abe's growth-revival plan.
But in a statement released after a two-day policy meeting, the
central bank's nine-member policy board reiterated that the world's
third-largest economy "continues to recover moderately." The only
area that it downgraded in its economic assessment was housing.
As was widely expected, the board led by Gov. Haruhiko Kuroda
unanimously voted to keep monetary policy on hold. The BOJ will
continue with its policy of buying Yen60 trillion to Yen70 trillion
in government bonds--the equivalent of 70% of newly issued JGBs--as
well as other assets every year to keep the economy awash with
cash, looking to eradicate over a decade of deflation.
The decision to stand pat demonstrates officials' confidence
that they will be achieve their stated 2% inflation target by
sometime next year, despite the growing skepticism of private
economists. Officials have promised to ramp up easing program only
if they are certain that they will miss the price goal.
The bank's leadership believes that the price goal is achievable
as long as the economy grows above a modest 0.5% annually. Japan's
supply constraints, such as a shortage of workers in the
construction and services industries, mean that the jobs market
will tighten further even if growth remains moderate. Companies
will raise paychecks to attract qualified workers, which will spur
consumption, officials say.
At his regular post-meeting news conference that will be held
Thursday afternoon, Gov. Haruhiko Kuroda will likely face a
grilling from reporters over why inflation has to accelerate from
late this year, as projected by the BOJ, when the economy is
expanding at a much slower rate than estimated by the central
bank.
The Japanese economy contracted sharply in the quarter through
June, as household spending fell at a record rate following the
increase in the national sales tax rate to 8% from 5% on April 1.
Spending dropped by some 6% in July, causing inventories to build
up at auto makers and dealing a blow to the housing market.
Private economists slashed their Japanese growth projections for
the year through March to 0.5% recently in response to a slew of
gloomy indicators. That is half of what the BOJ forecast in early
summer. Central bank officials will likely have to revise down
their growth forecast in late October, when the bank releases its
three-year growth and price outlook, although they are expected to
stick to their bullish price projections, according to people
familiar with the matter.
Toko Sekiguchi contributed to this article.
Write to Takashi Nakamichi at takashi.nakamichi@wsj.com and
Tatsuo Ito at tatsuo.ito@wsj.com
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