Bank of Japan offers brighter view

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BOJGovMay212014

Reuters.

Bank of Japan (BOJ) Governor Haruhiko Kuroda speaks during a news conference at the BOJ headquarters in Tokyo May 21, 2014. The Bank of Japan kept monetary policy steady and raised its assessment on capital expenditure on Wednesday, reassured by growing evidence the economy can withstand the pain from a sales tax hike without additional monetary stimulus.

Tokyo - The Bank of Japan (BOJ) kept monetary policy steady and raised its assessment on capital expenditure on Wednesday, reassured by growing evidence the economy can withstand the pain from a sales tax hike without additional monetary stimulus.

Governor Haruhiko Kuroda reiterated his optimism that Japan is on course to meet the bank's 2 percent inflation target in about a year from now, dampening already diminishing market expectations of near-term monetary easing.

“Our quantitative-easing policy is exerting its intended effects,” Kuroda told a news conference after the unanimous decision, using a more bullish phrase that the BOJ added to its economic statement.

“The Bank of Japan will continue with this policy until the 2 percent target is achieved in a sustained manner.”

The bank removed a phrase describing Japan as being in deflation, underscoring its confidence about meeting its price target without additional stimulus.

Such comments may further strengthen the yen, which held near a 3-1/2-month high against the dollar as hopes of further BOJ action faded, analysts say.

But Kuroda was also expected to remind markets that the central bank is ready to act if risks threaten achievement of the price target, given continued weakness in exports.

Exports rose for the 14th straight month in April but shipments to the United States slowed, data showed earlier on Wednesday, underlining concerns the world's third-largest economy remains vulnerable to any fall in external demand.

“The BOJ has judged that gains in capital expenditure are sustainable because more companies are facing capacity constraints,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

“The last time demand for labour and capacity was this high was around 2008, and inflation went above 2 percent. This will give the BOJ confidence that it can reach its target, so expectations for more easing will have to be scaled back.”

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.

“Capital expenditure has increased moderately as corporate profits have improved,” the bank said in its statement after the policy decision. That was more upbeat than last month's view that corporate spending was showing clearer signs of a pickup.

While few market players expected Kuroda to diverge from his generally optimistic stance on the economy at his post-meeting news conference, any hint the central bank may be ready to ease in the next few months could hit the yen, traders say.

“The yen would be sold if he raises expectations for near-term easing,” said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.

 

RISKS LOOM

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.

There has been 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 facilities.

But 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, exceeding a median market forecast and a 1.8 percent increase in March.

But they rose a meagre 0.6 percent in April from the previous month on a seasonally adjusted basis.

With export growth below last year's levels as the effect of a weak yen wears off, policymakers are becoming less confident of a lasting export upturn that would cushion a dip in domestic spending after the sales tax hike.

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 sceptical 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. - Reuters


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