Bank of Japan keeps policy steady; cuts export, output views

A woman walks past the Bank of Japan headquarters in Tokyo July 2, 2012.

TOKYO (Reuters) - The Bank of Japan kept monetary policy steady on Thursday but cut its assessment on exports and output as companies feel the pinch from slowing global growth, signalling its readiness to expand stimulus again if risks to the outlook grow.

The central bank also maintained its warning that the global economic outlook remained highly uncertain, with improvements in overseas growth seen limited in scope.

"The pick-up in exports has moderated, while production has been relatively weak," the BOJ said in a statement announcing its policy decision. That was a bleaker view than last month, when it said exports and output were picking up.

As widely expected, the central bank kept its key policy rate in a range of zero to 0.1 percent and refrained from topping up the 70 trillion yen ($890 billion) target for its asset buying and loan programme.

Pressure for immediate action has eased with the yen having barely moved after last week's better-than-expected U.S. jobs data, as well as decisions by the Federal Reserve and the European Central Bank to keep policy steady for now.

Many BOJ officials likely felt that there is not enough evidence yet that slowing global demand is hitting exports hard enough to offset strength in domestic demand.

"Japan's economy has started to pick up moderately on firm domestic demand," the central bank said, sticking to its forecast of a gradual recovery ahead.

Newly appointed members Takehiro Sato and Takahide Kiuchi joined the policy debate, bringing the nine-member board to full force for the first time since early April.

Both of them, formerly prominent economists, have argued that the BOJ's price forecasts are too optimistic and that there was more the bank can do, such as purchase foreign bonds.

Markets will be focusing on Governor Masaaki Shirakawa's post-meeting news conference for clues on whether the two will widen the scope for bolder BOJ measures to beat deflation.

OUTLOOK MURKY

Japan's economy is set to outperform most other developed nations thanks to solid domestic demand, with the International Monetary Fund forecasting growth of 2.5 percent this year.

That gives the BOJ more breathing space than its U.S. and European counterparts, which signalled acting as early as next month to battle slack growth and heightening market strains.

But the world economy is still dragged down by the deepening slump in Europe and emerging economies have yet to turn around for a sustained recovery, keeping Japanese policymakers worried about the impact on the export-reliant economy.

The BOJ joins central banks from Australia to the euro zone and Britain in leaving their policy on hold this month to save ammunition in case global conditions deteriorate further.

Having loosened policy in February and April, the BOJ has stressed that it will act again only if risks heighten enough to force it to abandon its recovery forecast.

It is counting on global demand for Japanese goods to pick up before the boost from spending for rebuilding from last year's earthquake peaks. But a growing number of BOJ officials are now less convinced about the strength of the recovery.

Manufacturing activity declined in July at the fastest pace since last year's earthquake. Exports marked the first annual drop in four months and factory output unexpectedly dipped in June as slowdowns in Europe and China hurt demand.

Japan's core machinery orders rebounded in June but companies expect orders to slide in the third quarter, data showed on Thursday, casting doubt on the strength of capital expenditure and adding to woes for Japan's recovery prospects.

($1 = 78.6600 Japanese yen)

(Additional reporting by Stanley White and Tetsushi Kajimoto; Editing by Kim Coghill)