BOJ Holds Stimulus as Weaker Economy Challenges Kuroda

The Bank of Japan maintained record stimulus after recent production and export data highlighted weakness that could challenge Governor Haruhiko Kuroda’s push to stoke faster inflation.

The central bank stuck with a pledge to increase the monetary base at an annual pace of 60 trillion yen to 70 trillion yen ($687 billion), the bank said in a statement today, as forecast by all 34 economists surveyed by Bloomberg News.

The BOJ cited “some weakness” in exports and production, striking a note of concern about the strength of the world’s third-biggest economy. Outbound shipments unexpectedly fell in June, while output slumped the most in more than three years as retail sales dropped, showing an economy struggling to rebound from a sales-tax increase last quarter.

“If exports continue to deteriorate and incomes don’t pick up, the BOJ will have to cut its overall assessment of the economy,” said Hideo Kumano, an economist at Dai-ichi Life Research Institute in Tokyo and a former BOJ official. “There is still sufficient room left for the BOJ to take further easing.”

The Topix index of shares fell 2.4 percent today in Tokyo, its biggest loss in three months, after U.S. President Barack Obama authorized air strikes in Iraq. The yen rose 0.4 percent against the dollar to 101.66 as of 4:47 p.m. in Tokyo.

Overall View

The central bank maintained its view that the economy has continued to recover moderately, and said the effects of the decline in demand following the tax increase have “gradually begun to wane on the whole.”

“There was a considerable rush in demand, so the setback was considerable,” Kuroda said at a press conference. “But the impact is gradually easing and that will probably continue. I don’t think anything unexpected is happening.”

The economy is estimated to have contracted an annualized 6.9 percent last quarter after April’s 3 percentage point levy hike that hurt household finances already squeezed by inflation that was nine times income growth in June.

Exports declined 1.1 percent in the second quarter from three months earlier, when they fell 1 percent, according to the BOJ, even after the yen weakened 17 percent against the dollar since Prime Minister Shinzo Abe took power in December 2012 with a mandate to reflate the economy.

Production slid more than forecast in June, dropping 3.3 percent from the previous month, the most since March 2011 when a record earthquake struck Japan’s economy. Retail sales fell 7 percent in the second quarter from the previous three months.

Tax Hike

“Exports have shown some weakness” the BOJ said, a change from July when it said they had “recently leveled off more or less.”

While output has continued to increase moderately, “it has recently shown some weakness,” the bank said. Last month, the BOJ said production had “continued to increase moderately as a trend, albeit with some fluctuations.”

Toyota Motor Corp. this week kept its forecast that its net income will fall from last year’s record 1.82 trillion yen, as Japan’s largest carmakers braced for slumping domestic sales following the increase the sales levy in April.

Takahide Kiuchi, one of the nine board members, said last week the BOJ needs to consider a recovery scenario that isn’t reliant on a pickup in exports.

Twenty-six percent of 34 economists surveyed by Bloomberg forecast the BOJ will increase stimulus at one of its two meetings in October, with 35 percent seeing a move by the end of the year. The survey was conducted July 30 to Aug. 1.

Inflation Target

Consumer prices rose 3.6 percent in June from a year earlier, outpacing a 0.4 percent gain in labor cash earnings. Stripped of the effects of the higher sales tax, core inflation -- the BOJ’s preferred gauge that excludes fresh food -- was 1.3 percent, more than halfway to the central bank’s target.

Megmilk Snow Brand Co. said on July 30 that it will raise prices of some dairy products from next month, increasing the price of milk by as much as 5.3 percent, due to rising costs of packaging and energy.

The recent weak data overshadowed a Cabinet Office report on July 17 in which the government raised its assessment of the economy for the first time in six months.

“The sense of stagnation in the economy will strengthen with weak exports and constraints on consumer spending from falling real incomes,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo.

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