The Bank of Japan maintained record stimulus to keep stoking inflation and boost economic momentum that’s been sapped by a higher sales tax.
The central bank kept its pledge to increase the monetary base at an annual pace of 60 trillion yen to 70 trillion yen ($667 billion), the bank said in a statement today, in line with all 31 economists surveyed by Bloomberg News.
Governor Haruhiko Kuroda said a moderate recovery would continue and indicated a weaker yen would support an economy that faces headwinds after the levy hike triggered the steepest contraction since the 2011 earthquake. Housing investment has continued to fall following the April increase while production has shown some weakness, the BOJ said in a statement.
“Kuroda indicated he wants the yen to weaken further as that will help the economy and the BOJ’s inflation goal,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA in Tokyo. “He really wants the government to go ahead with the planned sales-tax hike.”
Japan’s currency dropped after Kuroda said he wouldn’t be surprised if the dollar strengthens against the yen. “I don’t think that would be particularly bad for Japan’s economy,” Kuroda said at a press conference.
The currency was down 0.1 percent against the dollar at 104.88 at 5:44 p.m. in Tokyo. The Topix index of shares slid 0.4 percent today after closing yesterday at its highest in almost eight months.
Households’ spending and factory output were weaker than forecast in July while auto sales fell to a three-year low in August, pointing to weakness this quarter after the economy shrank an annualized 6.8 percent in the three months after the April sales-tax increase. Housing starts dropped for a fifth straight month in July.
While wages rose 2.6 percent in July from a year earlier -- the fastest pace since 1997 -- inflation including the higher levy was 3.4 percent, eroding households’ purchasing power.
The economic weakness adds to challenges for the central bank, which is buying record amounts of government bonds and other financial assets as Kuroda aids Prime Minister Shinzo Abe’s effort to resuscitate the world’s third-biggest economy.
Still, Kuroda predicted inflation would pick up toward the end of the year, and pointed to the improvement in incomes and the job market for his view that the economy can weather the higher sales levy.
Abe is set to decide by the year-end whether to go ahead with plans to raise the tax by another two percentage points to 10 percent next year, taking into account how resilient growth is in the third quarter.
Fiscal consolidation is vital for Japan’s finances and the future of the economy, Kuroda said. There was a risk that a failure to raise the tax could damage market confidence in the government’s effort to rein in its debt burden, now the heaviest in the world.
“There is a way to deal with the consequences of proceeding with the sales-tax increase,” Kuroda said. “Dealing with the risks that may arise from not raising it would be difficult. The probability of these appearing is low, but the impact could be huge and the risks would be big.”
BOJ officials expect Abe to proceed with the increase to maintain confidence in the government’s finances, according to people familiar with the discussions. Some officials said the central bank would be prepared to boost stimulus if necessary should the economy require more support following a higher levy, said the people, who asked not to be named because the talks are private.
Thirty-two percent of economists see the BOJ increasing its easing by the end of the year, according to a Bloomberg News survey conducted Aug. 25-29. Twenty-three percent forecast action in April next year or later, while 26 percent don’t see any extra easing.
The BOJ will maintain its optimistic view on achieving its goal, encouraged by the weak yen and improvement in wages, even as inclement weather in August affected the economy, Masamichi Adachi, an economist at JPMorgan Chase & Co. and former central bank official, said before today’s decision.
Western Japan including Osaka, Kyoto and Fukuoka had a “cold summer” for the first time in 11 years, with the fewest hours of daylight and the most precipitation for August since the Japan Meteorological Agency began collecting data in 1946, according to the agency. In eastern Japan, daylight hours were 29 percent less than an average year.