The Bank of Japan on Tuesday painted an upbeat picture of the world's number three economy and stood pat on its monetary easing programme as it assesses the impact of a controversial sales tax rise.
The BoJ stands pat on its monetary easing programme as it assesses the impact of a controversial sales tax rise
Policymakers decided to hold fire on the multi-billion-dollar asset-purchase scheme introduced in April last year as part of a drive by Prime Minister Shinzo Abe to drag the country out of years of deflation and slumbering growth.
"Japan's economy has continued to recover moderately as a trend, albeit with some fluctuations due to the consumption tax hike," the BoJ said in a statement after a two-day policy meeting.
"Private consumption and housing investment have remained resilient as a trend with improvement in the employment and income situation."
The yen strengthened slightly to following the announcement, with investors awaiting a news conference by BoJ chief Haruhiko Kuroda later in the day to see if he provides any clues about future policy. In afternoon Tokyo trade the dollar bought 102.90 yen, compared with 103.09 yen in New York Monday.
Markets had broadly expected the decision after the April 1 sales tax rise to 8.0 percent from 5.0 percent.
But while it is seen as crucial to shrinking Japan's mountainous debt burden it has increased speculation that the BoJ will have to at one point add to its stimulus to counter an expected slowdown in consumer spending.
The last time Japan introduced in a higher sales levy, in 1997, it was followed by years of deflation and tepid economic growth that defined the country's protracted slump.
"It came as no surprise that the Bank of Japan (BoJ) left policy settings unchanged today," said London-based Capital Economics.
"But markets may be disappointed in coming months as we think further easing will be announced later than many expect."
- More stimulus likely -
Kuroda -- the former head of the Asian Development Bank hand-picked by Abe to help steer his growth bid -- has said he would not hesitate to expand monetary easing to reach the BoJ's 2.0 percent inflation goal by next year.
Analysts have been increasingly sceptical about that timeline, but recent inflation data have suggested efforts to reverse falling prices and lacklustre growth were taking hold.
"Nonetheless, we still think that inflation will continue to fall short of the BoJ's 2.0 percent inflation target, which should eventually prompt the central bank to announce more stimulus," Capital Economics said.
"But this decision can wait until the second half of the year, perhaps until October."
The central bank's decision to pump billions of dollars into the financial system in an effort to stimulate lending and the wider economy -- similar to the US Federal Reserve's quantitative easing -- has received mixed reviews.
Some critics say it amounts to a money-printing exercise that will saddle Japan with even more debt but advocates have applauded the aggressive approach, a marked departure from previous administrations' more hesitant efforts.
Japan has seen a mixed bag of data lately, but surprisingly weak factory output in February and a cautious outlook among company managers have again raised concerns about the strength of Abe's efforts, dubbed Abenomics.
The BoJ's easing, which sharply weakened the yen in a boost for exporters, was meant to jerk the economy out of its slumber and create lasting inflation in a country where falling prices had become the norm.
While deflation may sound good for consumers, it means people tend to put off buying in the hope of getting goods cheaper down the road, hurting producers.
The BoJ programme was aimed at changing that psychology.
Deflationary "expectations -- a sense that prices would not increase -- became entrenched", Kuroda said in a speech last month.
"In order to escape such a situation, it has become necessary to pursue a policy that quickly and drastically changes people's sense that prices will not increase."