The Bank of Japan kept interest rates steady today and revised up its assessment on consumption, signalling its confidence a solid economic recovery would allow the central bank to raise interest rates again in coming months.
As widely expected, the Bank of Japan held short-term interest rates steady at 0.25% at its two-day meeting but noted improving domestic conditions, which help shore up the case to continue unwinding years of extraordinary monetary stimulus.
"Private consumption has been on a moderate increasing trend despite the impact of price rises and other factors," the Bank of Japan said in a statement announcing the decision.
The assessment was more optimistic than the previous view that consumption was resilient.
"Our decision on monetary policy will depend on economic, price and financial developments at the time," Bank of Japan Governor Kazuo Ueda said at a press conference after the meeting.
"Japan's real interest rates remain extremely low. If our economic and price forecasts are achieved, we will raise interest rates and adjust the degree of monetary support accordingly," he added.
The Bank of Japan ended negative interest rates in March and hiked short-term rates to 0.25% in July, in a landmark shift away from a decade-long stimulus programme aimed at firing up inflation.
The yen pared losses and the Nikkei average saw its gains shrink after the announcement, as the Bank of Japan's upbeat view on the outlook kept alive market expectations of a near-term rate hike.
"The upgrade in the BOJ's consumption assessment shows it is becoming increasingly convinced that things are on track, with rising wages pushing up household income and spending," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
"If upcoming data further underscores the Bank of Japan's optimism, we'll likely see another rate hike in December," she said.
Ueda has stressed the Bank of Japan's readiness to raise rates further if inflation remains on track to durably hit its 2% target, as the board currently projects.
His hawkish comments contrast with the postures of many other central banks, which are shifting to rate-cut cycles. The US Federal Reserve delivered an oversized reduction in borrowing costs on Wednesday.
A majority of economists polled by Reuters expect the Bank of Japan to raise rates again this year, with most betting on a December hike. None in the poll projected a rate increase this month.
Japanese core consumer inflation hit 2.8% in August to accelerate for the fourth month in a row, data showed today, keeping alive expectations for further rate hikes.
The chance to check data against its projections more carefully would come at the Bank of Japan's October 30-31 meeting, when the board will conduct a quarterly review of its forecasts.
Japan's economy expanded an annualised 2.9% in April-June and real wages rose for two months in a row in July, easing fears that rising living costs will dent consumption.
But soft demand in China, slowing US growth and the yen's recent rebound cloud the outlook for the export-reliant country.
Market volatility remains a key concern for Bank of Japan policymakers after the July rate hike and hawkish remarks from Ueda triggered a spike in the yen and sharp falls in equity prices.
Several Bank of Japan policymakers have called for scrutinising market moves in setting policy. But they also reiterated the bank's readiness to keep raising rates, with one hawkish board member saying short-term rates must eventually go up to around 1%.
