Bank of Japan Sticks to Easing Plan as Sales-Tax Increase Looms

The Bank of Japan maintained record easing, keeping ammunition as an April sales-tax bump threatens to trigger the deepest one-quarter contraction since the March 2011 earthquake.

The BOJ kept a pledge to expand the monetary base at a pace of 60 trillion to 70 trillion yen ($677 billion) per year, the central bank said in a statement in Tokyo today, in line with all but one of 34 forecasts in a Bloomberg News poll. The bank lowered its view of exports and lifted its assessments of industrial output and investment.

Governor Haruhiko Kuroda is predicted to face the biggest obstacle yet to his bid to generate 2 percent inflation as the first sales levy increase in 17 years squeezes households and businesses. Seventy-three percent of economists surveyed by Bloomberg forecast the BOJ will add to easing by the end of September to support the world’s third-biggest economy.

“The BOJ has to stand ready to act,” Kazuhiko Ogata, chief Japan economist at Credit Agricole SA., said before today’s decision. “Kuroda’s handling of monetary policy will be tested, as he doesn’t want to be seen as passive by moving too late.”

The yen strengthened against the dollar after the decision and was little changed at 103.30 at 5:50 p.m. in Tokyo. The Topix index of shares closed up 0.5 percent.

Debt Load

“We will adjust policy without hesitation if achieving 2 percent inflation becomes problematic or if smooth progress isn’t made toward the goal,” Kuroda told reporters after the decision.

Kuroda said he saw no need to change policy now, saying a positive economic cycle is continuing and growth will exceed potential even though it will rise and fall due to the tax increase. Downside risks in the global economy have been falling since last year, he said.

Prime Minister Shinzo Abe is raising the sales levy to 8 percent in April from 5 percent, as he tries to rein in a debt load that the International Monetary Fund projects will be equal to 242 percent of the economy by the end of the year.

Tackling Japan’s fiscal challenges is risky for Abe, who is spearheading an effort to end 15 years of falling consumer prices and stoke sustained recovery.

The economy is forecast to shrink 3.9 percent in the three months from April, according to a Bloomberg poll of economists, ending a projected six straight quarters of growth.

Falling Expectations

Japan’s economy grew less than economist estimated last quarter, revealing a lack of firm support from business investment and exports. A survey yesterday underlined concern about the impact of the higher levy.

Expectations of people such as taxi drivers, supermarket managers and restaurant workers for the economy two to three months ahead fell in February by the most since March 2011, when the economy was struck by an unprecedented earthquake and tsunami, erasing all the improvement made after Abe took office in December 2012, a Cabinet Office survey showed yesterday.

The government approved a 5.5 trillion yen extra budget in December to offset the impact of the higher sales levy.

Kuroda said exports have been weaker than the BOJ forecast when it began unprecedented easing in April, and cited developments in emerging markets. The central bank said in its statement that exports have leveled off recently.

Overseas shipment volumes fell 1.5 percent in 2013, as a slide in the yen didn’t deliver the boost seen after previous bouts of currency depreciation.

Balanced View

The BOJ said a pickup in business investment has become increasingly evident as corporate profits improved. Capital expenditure rose 0.8 percent in the last three months of 2013, the third consecutive quarter of growth, government data showed yesterday.

The BOJ’s decision to keep its overall assessment that the economy is gradually recovering may reflect an effort to temper market expectations for further stimulus, Yasunari Ueno, chief market economist at Mizuho Securities Co., wrote in a report after the decision. The bank’s view was a balanced one, with the stronger view on investment and production compensating for a lower assessment of exports, Ueno wrote.

While an expansion of easing will eventually be required, there are no signs that additional stimulus is imminent, Marcel Thieliant, a Singapore-based economist at Capital Economics, wrote in a note after the announcement.

The BOJ fueled expectations for further easing when it doubled the scale of lending programs on Feb. 18, with the Nikkei 225 Stock Average rising the most this year on that day. Eighty-eight percent of economists surveyed by Bloomberg foresee further easing by the end of the year.

Japan’s dependence on monetary policy to support growth is growing as Abe takes time to flesh out his growth strategy, the third “arrow” of Abenomics, while the public debt burden will make policy makers cautious about higher spending, said Chotaro Morita, chief debt strategist at SMBC Nikko Securities Inc.

“After all, it comes back to the BOJ,” Morita said before the decision. “A weak yen is the pillar of Abenomics and that has been driven in most part by the BOJ.”

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