The Bank of Japan has said it needs to do more to foster economic growth and renewed its commitment to ultra-loose monetary policy even as it forecast consumer prices would start rising again sooner than earlier thought.
As expected, the central bank refrained from new action at its policy meeting and kept its benchmark rate steady at 0.1 percent. It also left markets guessing what else it might have in store in its efforts to pull the world’s second-largest economy out of deflation.
“(Board) members shared the view that it was necessary for the bank to make new efforts to contribute to strengthening the foundations for economic growth,” the BOJ said in its policy statement.
It said, without elaborating, that the central bank’s staff had been instructed to look into ways of supporting financial institutions with funds.
It also forecast consumer prices would creep up 0.1 percent in the year to March 2012, bringing forward the expected end of persistent price declines that threatened to derail the recovery by hurting business and consumer spending.
Some market players took the central bank’s pledge to do more as a signal that it may try to bring down the benchmark interbank lending rate, which has remained relatively high.
“It appears that the Bank of Japan is thinking of some new form of market operation, or a tweak to its fund-supply tools to push down the longer end of the yield curve. I don’t think it is thinking of expanding the fund-supply operation it adopted in December,” said Yasuhide Yajima, senior economist at NLI Research Institute.
“I also think the BOJ won’t increase its government bond purchases. That’s the last thing they want to do. It may come up with something new to push down yields and will probably make an announcement in May or June.”
The announcement may also be seen as a way of pre-empting any future calls from the government for more action.
“That’s the mode they’ve been in for the past six months – making token shifts to demonstrate cooperation but without changing anything particularly fundamental,” said Richard Jerram, chief economist at Macquarie Securities in Tokyo.
In its twice-yearly outlook report, the central bank painted a rosier outlook of the economy to say it is expected to recover as a trend. It also forecast core consumer prices would rise 0.1 percent in the year to March 2012. Three months ago it had predicted a 0.2 percent decline.
But analysts said the upgrade was too subtle to warrant any policy shift.
“There will be no change to the BOJ’s stance of keeping the current easy policy stance. The central bank’s projections also don’t alter our view that the central bank will not raise interest rates until the latter half of fiscal 2012/13,” said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.
Core consumer prices fell 1.2 percent in March, the same pace of fall as in February and marking the 13 straight month of decline.
However, figures for the Tokyo area, available a month before nationwide figures, showed the decline was slowing when one factored out the impact of the government’s new policy of making public high school tuition free.
Finance Minister Naoto Kan, speaking as the central bank board met, noted the encouraging signs in the data, suggesting the government agreed with the BOJ’s assessment.
The BOJ has kept its main interest rate at 0.1 percent since late 2008 and eased its policy in December 2009 and again in March by setting up and later expanding a facility offering cheap funds to banks.