Japan central bank keeps extreme easing policy steady, upgrades view of economy

TOKYO – Japan’s central bank ended a two-day policy meeting on Tuesday with an upbeat assessment for the world’s No. 3 economy and a pledge to persist with its aggressive monetary easing policies aimed at ending years of growth-sapping deflation.

The Bank of Japan refrained, however, from taking further action to curb unusual volatility in the market for Japanese government bonds that has raised concern over the potential impact of Prime Minister Shinzo Abe’s economic strategies on the country’s rising public debt.

“Japan’s economy has been picking up,” the central bank said, supported by government and consumer spending.

The stronger assessment followed a revision of data to show growth recovered to 4.1 per cent in January-March, raising hopes that Prime Minister Shinzo Abe’s heavy-spending recovery strategy may be helping end a two-decade-long slump.

However, data remain mixed. Data released Tuesday showed machinery orders fell 7.4 per cent in May from a year earlier. Orders by domestic companies fell 11.2 per cent, while overseas orders dropped 5.7 per cent.

The central bank’s assessment was that corporate fixed investment in factories and equipment “appears to have stopped weakening.” A recovery in such investment, and in hiring and wages, would be crucial for a sustained recovery from over two decades of economic stagnation, but most businesses remain wary of sinking more money into Japan at a time when its population is aging and shrinking.

To encourage more investment, the government plans to draw up plans for tax reform by the autumn, when it is due to decide whether the recovery is strong enough to endure the blow to demand from sales tax hikes due in 2014 and 2015.

The tax increases are needed to cope with a growing public debt that already is more than twice the size of Japan’s economy.

While Abe’s “Abenomics” economic policies have helped boost share prices and raised hopes for a sustained recovery, the central bank remains far from its target of achieving 2 per cent inflation within the next two years.

Prices have continued to fall despite aggressive efforts to counter deflation by doubling the monetary base, the central bank said, though it added it expects the rate of change in the inflation benchmark to “gradually turn positive.”

The bank noted, however, a “high degree of uncertainty” for Japan, as well as the U.S., Europe and emerging economies, and lacklustre activity in Japanese manufacturing.