Roundup: BOJ holds pat on policy, lowers economic view as production, exports still sluggish

The Bank of Japan on (BOJ) Tuesday opted to hold pat on its policy despite downgrading the view of the world's third-largest economy after it decided to plunge its interest rate into negative territory at the end of January, following an economic contraction in the last quarter as consumption waned and exports remained stifled.

Following the conclusion of its monthly two-day policy meeting, the central bank's nine-member Policy Board voted by eight to one to maintain its current monetary easing policy which includes increasing the country's monetary base by 80 trillion yen (705.36 billion U.S. dollars) annually.

By a vote of seven to two, the BOJ voted to keep the rate it charges commercial banks on certain reserves at its newly-decided 0.1 percent.

The BOJ said it would continue to monitor recent market volatility and the impact this has had on business confidence here as pertains to its reflationary goals, with the bank suggesting that money reserve funds (MRFs) may also be charged interest in a subsequent review, if it looks like the bank's 2 percent inflation goal may become untenable, or, in a more aggressive move, a possible ramping up of its already sizable asset purchasing program to keep its goals in sight.

The bank did note, to this end, that its latest price gauge showed that inflation had flatlined, an indication economists here have said is a harbinger for further possible easing in the months ahead.

"On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is about 0 percent. Although inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, they have recently weakened," the BOJ said in a statement, with its chief saying it would still take time for the effects of its negative rate policy to be quantifiable.

"We're clearly seeing the effect of the negative rate policy on interest rates. The effect will spread to the economy and prices from now on," BOJ Governor Haruhiko Kuroda told a press conference after the bank's policy meeting Tuesday, adding, "I believe the effects will spread to the real economy and prices," and that the policy will bring "a broad-based plus for people's lives."

But local economists maintained Tuesday that for all Kuroda's usual upbeat oratory, the bank may opt to unroll further easing measures in July, once the effects of the current negative interest rates are fully known, coupled with the latest GDP data being released showing the state of the economy following the yen's comparative firmness against a basket of other currencies, an ongoing drop in oil prices, which while helping imports also negatively impacts the yen which is used as a safe haven when investors flee from riskier assets like stocks when oil prices tank, against a backdrop of pressured exports and falling output as demand wanes.

"Japan's economy has continued its moderate recovery trend," the bank said in its official statement Tuesday, downgrading its view from last month.

"Exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies. Overseas economies have continued to grow at a moderate pace, but the pace of growth has somewhat decelerated mainly in emerging economies," the BOJ said.

Kuroda added that the central bank would not necessarily wait for the effects of the bank's previous measure to become numerical before using more of the bank's easing weaponry, as was the case in its latest move that rattled markets in January, despite the move, thus far, doing little to lift the stock market, or curb the yen's rise, which has vexed brokers, politicians and confused the public who viewed the move as running contrary to a healthy economy and triggered fears it could ignite a currency war.

The central bank said both production and exports were expected to remain "sluggish" for the time being, with the economy expected to remain on a "moderate expanding trend" with risks to the economic outlook here connected to both emerging and commodity-exporting economies, responses to financial markets by any change in monetary policy by the U.S. Federal Reserve, Europe's ongoing debt crisis including central banks in Europe's own easing measures to counter, as well as global geopolitical concerns.

And as the economy here faces the very real risk of entering a technical recession if the current quarter shows a contraction, as may well be the case, leading economists believe the BOJ may be leaning towards upping the pace and size of its asset purchasing program rather than slashing further into its interest rate, in an attempt to achieve its lofty 2 percent inflation target, as the bank stands poised to lower both its growth and inflation outlooks in its quarterly review, as experts have attested. Enditem