Japan central bank holds off on more monetary stimulus as core inflation, family spending drop

TOKYO – Japan’s central bank kept its monetary policy unchanged Friday, but hinted it could expand its already expansive stimulus in the future to counter slowing exports and other threats to growth.

The decision came despite fresh evidence that the Bank of Japan is making little headway in its unprecedented effort to spur inflation in the world’s third largest economy.

Data for September showed the core inflation rate, which excludes volatile food prices, was minus 0.1 per cent while household incomes and spending also fell.

In a statement, the Bank of Japan cited slowing growth in China and other emerging markets as a factor behind weakening exports and industrial production.

Hinting it may consider further action later, the BOJ said it would study risks to economic activity and prices “and make adjustments as appropriate.”

Central bank asset purchases are injecting tens of billions of dollars of cash into the economy each month. But with inflation still near zero, many economists had expected a “surprise” move by BOJ Gov. Haruhiko Kuroda.

The U.S. Federal Reserve is moving toward raising interest rates and winding down central bank asset purchases, but Japan remains firmly in loosening mode along with the European Central Bank.

Prime Minister Shinzo Abe’s economic policies are aimed at getting consumers and businesses to spent more, both by keeping interest rates at record low levels and by fostering expectations that inflation will erode future purchasing power.

But the economy contracted at a 1.2 per cent annual rate in the April-June quarter and many economists expect it to have again lost ground in July-September.

Earlier Friday, the BOJ issued a short statement saying it was keeping its policies as is. As usual, economist Takahide Kiuchi was the policy board’s lone dissenter, advocating a sharp cutback in asset purchases.

Data released earlier this week showed stronger-than-expected manufacturing output in September. That may have alleviated pressure on the BOJ to take further action to spur growth.

But Kuroda, while repeatedly insisting the economy is in the midst of a “moderate recovery,” has contended all along that the BOJ has done everything it can to boost growth.

The latest data are typical of the mixed signals that have obscured the actual state of Japan’s recovery.

Overall inflation was flat from a year earlier. Household spending fell 0.4 per cent in September from a year earlier, while incomes slipped 1.5 per cent.

Unemployment remained at 3.4 per cent, and there were 1.24 jobs available for each job seeker, the data showed.

Tight labour conditions are expected to force companies to raise wages, in turn causing inflation to rise. But companies have expanded overtime and hired more part-time workers, to avoid significant increases in labour costs.

That has hindered efforts to boost inflation, the central bank said in its analysis, noting that “given that firms have been seeing record profits and the unemployment rate has declined to the range of 3.0 per cent to 3.5 per cent, the pace of improvement in wages has been somewhat slow.”

The plunge in oil prices over the past two years has also sapped any inflationary pressure, further diluting any impact from monetary easing, said Richard Katz of the Oriental Economist.

“In an era of near-zero interest rates, monetary ease loses its normal punch,” he wrote in a commentary.


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The story has corrected to show that the Bank of Japan governor is Haruhiko Kuroda.