The Bank of Japan kept monetary policy steady today and upgraded its economic forecast for next fiscal year, but it warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery. 

Policymakers, however, signalled they have delivered sufficient stimulus for now to cushion the blow from the Covid-19 pandemic. 

"I don't think the risk of Japan sliding back into deflation is high. But potential growth may be falling so we need to look at the impact on prices carefully," Bank of Japan Governor Haruhiko Kuroda told a news conference. 

As widely expected, the Bank of Japan maintained its targets under yield curve control (YCC) at -0.1% for short-term rates and around 0% for 10-year bond yields. 

Deputy Governor Masayoshi Amamiya was absent from the meeting because he stayed home as a precaution after a relative took a PCR test for the coronavirus, the bank said. 

In new projections, the Bank of Japan upgraded next fiscal year's growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government's huge spending package will soften the blow from the pandemic. 

It also upgraded its assessment on capital expenditure to say it was bottoming out, and projected exports to increase broadly thanks to robust overseas demand. 

But it offered a bleaker view on consumption, warning that services spending will remain under "strong downward pressure" and could add deflationary impulse to the economy. 
 

"Japan's economy is picking up as a trend," the bank said in the report, offering a slightly more nuanced view than last month when it said growth was "picking up." 

Many analysts had expected the Bank of Japan to hold fire ahead of the bank's review of its policy tools scheduled in March, which aims to make them more sustainable as Japan braces for a prolonged battle with Covid-19. 

Sources have told Reuters the bank will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.