Bank of Japan upbeat

People walk out from the Bank of Japan headquarters in Tokyo.

People walk out from the Bank of Japan headquarters in Tokyo.

Published Jul 7, 2014

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Tokyo - The Bank of Japan kept its upbeat assessment for all of the country's nine regions, saying a moderate recovery was taking hold and bolstering views the economy is on track to meet the central bank's price target without more monetary stimulus.

But central bank governor, Haruhiko Kuroda, stressed his resolve to maintain the massive stimulus programme for as long as necessary to sustainably achieve its 2 percent inflation target, reassuring markets that an exit from the ultra-loose policy was still distant.

“The BOJ will examine upside and downside risks to the economy and prices, and adjust monetary policy as needed,” he told a meeting of the BOJ's regional branch managers on Monday.

With Japan only halfway to meeting its price target, the BOJ is set to keep its stimulus plan intact well into next year in contrast to its US and British counterparts, which are starting to telegraph plans for rate hikes.

Still, market expectations of additional monetary easing by the BOJ have diminished significantly on brightening prospects for the world's third-largest economy.

In a quarterly report released after the meeting, all nine regions stuck to their assessment that their economies continued to recover moderately despite the pain from an increase in the sales tax to 8 percent from 5 percent in April.

Of the nine regions, four raised their assessment on capital expenditure to say it was picking up or increasing further, suggesting that the positive effect of premier Shinzo Abe's package of stimulus programmes and growth strategies - dubbed “Abenomics - is working its way through the economy.

“Companies that saw revenues increase are using the money to boost capital expenditure,” said Toru Umemori, head of the BOJ's branch in Nagoya of the Tokai central Japan region - home to auto giant Toyota Motor Corp.

“More firms are ramping up spending and that trend is broadening,” he told a news conference.

The nine regions maintained their view from three months ago that household spending was picking up or recovering moderately despite the impact of the tax hike.

“Consumer spending is likely to stay firm as a trend with the effect of the tax hike seen subsiding around the summer as wage and income conditions improve,” the report said, adding that the resilience in consumption was encouraging more firms to raise prices of their goods and services.

 

SUPPLY CONSTRAINTS

The BOJ has keep monetary policy steady since deploying an intense burst of monetary stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in roughly two years.

Kuroda has repeatedly stressed that Japan can ride out the tax hike as the positive mood generated by “Abenomics” encourage companies to boost wages and capital expenditure.

There are signs the outlook for exports, a soft spot in an otherwise solid recovery, is picking up with electronic makers receiving increased orders for smartphone parts, the BOJ's regional report said.

Underscoring the optimism, the BOJ's “tankan” survey showed last week that business sentiment was poised to improve in the current quarter to September and major firms planned to increase spending more than expected this year.

Nominal wages in May also rose at the fastest annual pace since 2012 while the jobless rate hit 3.5 percent, the lowest in more than 16 years and a level the BOJ considers as near full employment.

While the increase in jobs available is positive for households, there are initial signs a shrinking labour force in a rapidly ageing population may curb long-term economic growth.

Some retailers - mainly mid-sized supermarket chains - are starting to worry that labour shortages may force them to hold off on opening new outlets, said Atsushi Miyanoya, head of the BOJ's branch in Osaka, western Japan.

“It's not something affecting companies now but some of them see this as a future risk,” he told a news conference.

Rising crude oil prices are also emerging as a headache for some manufacturers, who say they do not favour a further weakening of the yen as it would inflate already high energy costs, said Umemori of the Nagoya branch.

The report will be among factors that the BOJ's board members will scrutinise at their policy-setting meeting next week, when they are set to keep monetary settings unchanged and conduct a quarterly review of their long-term growth forecasts. - Reuters

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