Japan holds fire on new easing measures, says economy improving

Japan holds fire on new easing measures, says economy improving

The Bank of Japan on Wednesday held off expanding its monetary easing campaign and said the world's number three economy was picking up pace, despite fears that a sales tax rise will dent consumer spending.

An employee of Japan's Fuji Heavy Industries is seen working on its Subaru brand cars on the assembly line at Yajima plant in Ota, Gunma prefecture, on January 9, 2014

Policymakers dropped the word "deflation" from their post-meeting statement after unanimously agreeing to keep the central bank's stimulus programme unchanged following a two-day meeting -- a possible signal that efforts to conquer years of falling prices could be paying off.

The bank said its moves to boost laggard growth were taking hold, with Japan's economy "expected to continue a moderate recovery".

"Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects and the bank will continue with the QQE... as long as it is necessary" to reach stable inflation, the bank said.

The yen strengthened after the announcement, with the dollar buying 101.20 yen from above 101.30 yen before the BoJ statement.

Investors are now awaiting a regular press briefing by BoJ governor Haruhiko Kuroda at about 3:30 pm local time (0630 GMT) for clues about when the bank might pull the trigger on further measures.

The unprecedented programme announced last year, similar to the US Federal Reserve's asset-buying plan, is aimed at stimulating growth by injecting massive amounts of money into the financial system and trying to reach a 2.0 percent inflation target by next year.

Kuroda has previously said he would not hesitate to act as fears grow over the impact of Japan's April 1 sales tax rise.

"The optimistic tone of recent BoJ communication suggests that the chances of additional stimulus being announced as soon as July have shrunk substantially, but we still think that more easing will eventually be required," said London-based Capital Economics.

The widely-expected BoJ decision came hours after fresh data showed Japan's trade deficit narrowed again last month as the levy hike weighed on imports -- denting demand for foreign fruit, lobsters and crude oil -- while shipments of goods to overseas markets rose.

- Volatile data -

The data suggested the impact of a weak yen -- which sent Japan's energy import bill soaring in the wake of the 2011 Fukushima nuclear crisis -- was starting to ease, and comes after Japan logged its strongest economic growth in more than two years during the first quarter.

But the tax rise to 8.0 percent from 5.0 percent threatens to stall activity in the coming months, and has raised concerns it will derail Prime Minister Shinzo Abe's growth blitz, dubbed Abenomics.

Japan's recent economic data has been volatile, with the tax rise skewing results, as questions linger about Abe's growth push. The plan called for big government spending, central bank monetary easing and deregulation as the prescription for kickstarting growth.

The moves ushered in a sharp drop in the yen -- giving a lift to exporters' profitability -- and a stock market rally last year.

But critics say Abe has yet to follow through on structural reforms to the economy, including shaking up labour markets, signing free-trade deals and bringing more women into the workforce.

Highlighting the effect of the tax rise was a nearly 36 percent drop in the import volume of shrimps, prawns and lobsters along with a fall in fruit shipments from overseas as restaurants and retailers saw demand slump.

The finance ministry data showed the trade deficit shrank 7.8 percent on-year in April, with Japan logging a shortfall of 808.9 billion yen ($8.0 billion) against the year-before deficit of 877.4 billion yen.

Exports climbed 5.1 percent to 6.07 trillion yen on robust shipments of automobiles and memory chips.

Imports rose 3.4 percent to 6.88 trillion yen, a much slower rate than high-paced rises seen over more than a year.

"Exports were solid and showed signs of future growth," said Masahiko Hashimoto, economist at Daiwa Institute of Research.

"Imports fell on a range of goods... The drop in crude oil imports was particularly big."

Hashimoto added that Japan was likely to see a "shrinking trend" in its trade deficit.

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