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BOJ says economy recovering, unfazed by China slowdown

The Bank of Japan said the world's third-largest economy was finally recovering as it kept monetary policy steady, its most optimistic view in two-and-half years reflecting the impact of a weakening yen and its massive monetary stimulus on activity.

BOJ Governor Haruhiko Kuroda said on Thursday while overseas economies were weaker than expected that would be offset by robust domestic consumer spending and a pick-up in capital expenditure, and so he remained confident of meeting a target of lifting inflation to 2 percent in roughly two years.

He said the BOJ was monitoring developments in China, Japan's main trading partner, as growth slowed and as authorities tried to rein in sharp growth in informal lending.

"Chinese policymakers have clearly shifted to a stance of emphasizing the quality of economic growth rather than speed," Kuroda told a news conference after the BOJ's policy review.

"Still, there's no change to our forecast that China's economy will continue to achieve strong, stable growth."

Earlier, the central bank's board voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60 trillion to 70 trillion yen ($600 billion-$700 billion).

"Japan's economy is starting to recover moderately," the central bank said in a statement after its two-day meeting, revising up its assessment for the seventh straight month.

The last time the BOJ used the word "recover" to describe the economy was in January 2011, two months before the March 11 earthquake and tsunami that devastated the country.

The central bank made no major changes to its forecast that consumer inflation would accelerate in the coming years to near 2 percent in the business year ending March 2016, a key target for Prime Minister Shinzo Abe's drive to reflate the economy.

Many central bank officials are encouraged by bright signs in the economy as the yen's fall to multi-year lows supports exports and the feel-good mood generated by Abe's reflationary strategy bolsters consumer spending and business confidence.

Data on Thursday supported that view, with core machinery orders, a leading indicator of capital expenditure, rising a bigger-than-expected 10.5 percent in May.

The BOJ's optimism suggests it will probably hold off on any additional stimulus at least until late October, when it overhauls its economic and price projections, analysts said.

"There's no material change to the BOJ's forecasts from April. Basically, the economy is recovering in line with its main scenario," said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

Ambitious Target

Kuroda said while markets have been nervous about the outlook for U.S. monetary policy, there was a growing understanding about the Fed's policy intentions as it signaled a possible tapering of its own monetary stimulus.

"We must continue to scrutinize the impact such monetary policy developments could have on emerging markets," he said.

The market volatility appears to have had little impact so far on Japan's economy, which emerged from a recession late last year to grow an annualized 4.1 percent in the March quarter.

The BOJ board slightly cut its median forecast for core consumer inflation to 0.6 percent for the current business year to March 2014 from a 0.7 percent forecast in April, due to the impact of falling commodity prices.

It also tweaked its core consumer inflation projection for the following year to 1.3 percent from 1.4 percent, but kept its estimate for fiscal 2015/16 unchanged at 1.9 percent.

The projection remains far more ambitious than private-sector forecasts around 1 percent, a sign many analysts doubt there can be a quick exit from 15 years of deflation.

Kuroda said inflation expectations were already rising and expected the improving economy to gradually lift wages.

But many analysts seen his inflation goal as overly ambitious, and even BOJ board members Takehiro Sato and Takahide Kiuchi, both economists, remain skeptical as to whether inflation can pick up that fast.

Yamamoto of Mizuho Research said the BOJ's inflation forecasts were too optimistic given concerns that demand could drop after an expected sales tax hike next April.

"The BOJ could move again early next year as downside risks to its price target are likely to become more clear," he said.

($1 = 100.1050 Japanese yen)

[Source: By Leika Kihara and Stanley White, Reuters, Tokyo, 11Jul13]

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