Japan central bank yesterday kept its monetary policy mostly unchanged, but noted a raft of risks for an economy making scant headway toward a sustained recovery.
Analysts had been divided over whether the Bank of Japan (BOJ) would expand its lavish asset purchases or cut interest rates further to spur growth. The decision to wait-and-see took share prices lower in most regional markets.
Japan’s economy contracted in the final quarter of last year, buffeted by the slowdown in China and other emerging economies. Recent data suggest it might shrink again during this quarter, in what would be Japan’s third “technical recession,” or two straight quarters of contraction, in four years.
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“While the BOJ refrained from adding more stimulus today, sluggish economic activity and the stronger yen suggest that policymakers will have to announce more easing soon,” Marcel Thieliant of Capital Economics said in a research note.
The continued weakness spurred the BOJ to impose a “negative interest rate” policy that took effect last month and requires banks to pay a fee of 0.1 percent on excess reserves kept at the central bank.
That measure followed similar moves in Europe, but is unpopular with financial circles and the public, who are seeing rates paid on their own savings deposits shrink ever closer to zero.
The BOJ’s meeting comes ahead of a meeting this week by the US Federal Reserve that will be closely watched for hints of possible future rate hikes.
Japan’s interest rates have remained near zero for years. Under BOJ Governor Haruhiko Kuroda, the central bank has been buying roughly ¥80 trillion (US$700 billion) of government bonds and other assets a year.
The injections of cash into the economy are meant to drive prices higher, prompting businesses and consumers to spend more, but demand has remained tepid, falling 1.2 percent from a year earlier in the October-to-December quarter.
Given that trend, the BOJ’s description of private demand as “resilient” marked a “fresh high of absurdity,” Thieliant said.
Japan’s current spring “labor offensive” is expected to yield only modest wage increases, despite appeals to the business community to do more to help support the economy.
The BOJ’s statement yesterday noted a slowdown in housing and public investments and recent volatility in global financial markets.
It forecast that exports and industrial output would remain sluggish and said inflation was likely to stay at about zero percent for now, but eventually climb toward a 2 percent target set nearly three years ago.
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