Bank of Japan holds off fresh stimulus despite weaker economy

Thursday 04 September 2014 08.37
The Bank of Japan sticks with its view that the world's third biggest economy is recovering
The Bank of Japan sticks with its view that the world's third biggest economy is recovering

The Bank of Japan today stuck by its view that the world's third biggest economy was recovering, despite a contraction in the second quarter that underlined the damage inflicted by an April sales tax hike. 

Policymakers maintained the Bank of Japan's vast stimulus programme following a two-day policy meeting.

However, they flagged housing and industrial production as weak spots, along with shaky demand for Japanese exports. 

Japan's economy suffered its biggest quarterly contraction since the 2011 earthquake and tsunami as the levy hike slammed the brakes on growth between April and June, throwing into question plans for another rate increase next year. 

The 1.7% dip in gross domestic product - or a 6.8% contraction at an annualised rate - gave the clearest picture yet of the impact of the tax hike. 

It also underlined an apparently widening gap between the bank's upbeat view of Japan's economy and official data. 

For the last 20 meetings, the Bank of Japan has held off making any major adjustments to its huge monetary easing plan unleashed in April 2013, despite rising speculation that it would have to act in the wake of the tax rise. 

Japan's top central banker has given little indication he would soon pull the trigger on further stimulus - similar to the Federal Reserve's quantitative easing - saying the impact of the sales tax hike has not been as bad as expected. 

However, Kuroda has pledged to take further action if necessary, after he was picked by Prime Minister Shinzo Abe as a key player in Tokyo's bid to stimulate the laggard economy. 

The Bank of Japan statement pointed to a decline in the property sector and said factory output has "recently shown some weakness" - a term it also applied to exports. 

But it also noted that employment and wage growth were "improving steadily". 

"Japan's economy has continued to recover moderately as a trend, although the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike has been observed," it said, echoing earlier statements. 

It added that it expected the negative impact of the rate rise "to wane gradually".