TOKYO: The Bank of Japan (BoJ) on Thursday stuck by its view that the world’s number three economy was recovering, despite a contraction in the second quarter that underlined the damage inflicted by an April sales tax hike.
Policymakers held fire on expanding the bank’s vast stimulus program following a two-day policy meeting, although they flagged housing and factory output as weak spots, along with shaky demand for Japanese exports.
Investors will now turn their focus to a regular post-meeting briefing by governor Haruhiko Kuroda at 6:30 a.m. local time to see if he hints at future moves to counter the downturn.
The April to June quarter saw Japan’s economy suffer its deepest quarterly contraction since the 2011 quake and tsunami owing to April’s sales tax hike.
The 1.7 percent dip in gross domestic product—or a 6.8 percent contraction at an annualized rate—gave the clearest picture yet of the impact of the tax hike and has thrown into question plans for another rise next year.
It also underlined an apparently widening gap between the BoJ’s upbeat view of Japan’s economy and official data.
For the past 20 meetings, the BoJ has held off making any major adjustments to its stimulus unleashed in April 2013, despite growing calls to act in the face of softening data.
Kuroda has given little indication he will soon increase its asset-purchasing 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, he has pledged to take further action if necessary.
The former Asian Development Bank head was tapped last year by Prime Minister Shinzo Abe as a key player in Tokyo’s plans to stimulate the laggard economy.
‘Glass half full’
On Thursday, the BoJ pointed to a decline in the real-estate 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.
The BoJ added that it expects the negative impact of the rate rise “to wane gradually.”
However, in July it slightly lowered its growth forecast for the current fiscal year to March to 1.0 percent from a previous 1.1 percent estimate. It had been predicting growth of 1.5 percent in late 2013.
The decision to stand pat again will likely see economists roll back their expectations for further easing in the last quarter of 2014.
“The key question ahead of today’s meeting was how the bank would react to the poor Q2 GDP figures,” Capital Economics said in a note.
“The Board’s glass-half-full rhetoric suggests that the chances of additional easing being announced as early as next month, which had been expected by a number of analysts until recently, have further diminished.
“However, inflation is set to fall short of the Bank’s forecasts by year-end, while the recovery is set to remain sluggish.”
It added that “that a more aggressive pace of purchases may still eventually be required.”