August 7, 2015 / 3:29 AM / in 4 years

BOJ stands pat, upbeat on economy despite expected second-quarter contraction

TOKYO (Reuters) - The Bank of Japan maintained its massive stimulus programme and upbeat view of the economy on Friday, unfazed by a recent batch of weak data that clouded the prospects for hitting its ambitious inflation target.

A man cycles in front of the Bank of Japan (BOJ) building in Tokyo, June 24, 2015. REUTERS/Toru Hanai

BOJ Governor Haruhiko Kuroda stressed that the current weakness in Japan’s exports and household spending was temporary, sticking to the view the world’s third largest economy continues to recover moderately.

“More companies are raising the prices of their goods ands services, which shows the underlying trend of inflation is improving,” Kuroda told a news conference.

As widely expected, the BOJ reiterated its pledge to increase base money, or cash and deposits at the central bank, at an annual pace of 80 trillion yen (413 billion pounds) through purchases of government bonds and risky assets.

“Japan’s economy continues to recover moderately,” the BOJ said in a statement issued after the decision.

“Exports and output are picking up, albeit with some fluctuations,” it said, keeping its assessment unchanged from last month.

Many analysts expect gross domestic product data, due out on Aug. 17, to show Japan’s economy shrank in the second quarter on soft exports and weak household spending.

While growth is expected to rebound in the current quarter, some analysts warn that sluggish demand in China and tame wage growth at home will keep any pick-up modest.

Kuroda acknowledged that China and other emerging market economies were slowing. But he clung to the view that overseas demand will pick up as strength in advanced economies broadens out.

The BOJ’s rosy forecast is, however, increasingly at odds with economists, who say there is very little chance of it meeting that inflation target so quickly.

“Consumer prices could dip into negative territory and stay there longer than expected. The BOJ may ease again in October,” said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

Concern about the BOJ’s price target could grow after data earlier this week showed real wages fell in June at the fastest pace in seven months.

Renewed falls in oil and commodities prices are also adding downward pressure on inflation.

The BOJ has left policy unchanged since expanding stimulus in October last year, but some economists doubt how much longer the BOJ can afford to remain on the sidelines.

Reporting by Leika Kihara and Stanley White; Editing by Eric Meijer

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