Bank of Japan maintains huge stimulus programme

Friday 04 October 2013 07.45
Bank of Japan says the world's third largest economy is recovering moderately
Bank of Japan says the world's third largest economy is recovering moderately

The Bank of Japan maintained its massive monetary stimulus and upgraded its view on capital expenditure, encouraged by growing signs that the benefits of its aggressive policy action to escape deflation are broadening.

After a two day review, the central bank reiterated its view the world's third largest economy is recovering moderately.

This suggested that no additional monetary policy measures are needed to counter the pain from next year's sales tax hike.

"Capital expenditure is picking up as corporate profits improve," the Bank of Japan said in a statement. That was slightly more optimistic than last month, when it said capital spending was showing signs of a pick-up.

As widely expected, the bank kept intact its April commitment to double base money via asset purchases to meet its target of lifting inflation to 2% in roughly two years.

The policy review followed Prime Minister Shinzo Abe's decision earlier this week to proceed with a planned increase in the sales tax to 8% from 5% next April and cushion its impact with a 5 trillion yen ($51 billion) stimulus package.

The Bank of Japan expects the sales tax increase to shave about 0.7 percentage point off growth. For now, it sees no need to expand its stimulus further, confident that the world's third-largest economy can withstand the hit.

The bank's board was expected to have debated the benefits the fiscal package will deliver to the economy, as well as global risks such as the U.S. government shutdown and the October 17 deadline for a deal to raise the US debt ceiling.

Japan's economy has now grown for three successive quarters as Abe's reflationary policies bolstered household spending and drove down the yen, benefiting exports, with annualised growth of 3.8% in April-June outpacing many G7 nations.

Big manufacturers' sentiment has risen to its highest in nearly six years, the bank's "tankan" survey for the September quarter showed, underscoring its view the economy is on track for a moderate recovery.

Policymakers see capital expenditure and wage growth as key in achieving a sustained economic recovery and pulling Japan out of deflation, because companies have been hoarding cash instead of spending for decades due to the murky economic outlook.

The Bank of Japan estimates that even with the sales tax increase, the economy will expand 1.3% in the business year beginning in April next year. This already far outpaces the 0.7% growth projected in a recent Reuters poll.

Having launched its intense burst of stimulus in April, the Bank of Japan does not want to act again easily. But it has not ruled out expanding stimulus if the damage from the tax hike proves bigger than expected and threatens achievement of 2% inflation.

The big test will come in spring next year, and not just from the sales tax hike. There will also be more clarity on whether companies will raise wages enough to offset some of the pain households will feel from the tax hike, Bank of Japan officials say.