Japan's central bank keeps policy intact, upgrades outlook

Japan's central bank wrapped up its first board meeting of the year today with a decision to keep its ultra-loose monetary policy unchanged, though it upgraded its growth forecasts for the world's third-largest economy.

The Bank of Japan cited easy lending conditions, rising exports and stronger government and corporate spending, in part linked to the 2020 Tokyo Olympics, as reasons to expect a more robust recovery, despite recent weakness in consumption and investment.

It forecast the economy will grow at a 1.4 per cent annual pace in the current fiscal year, which ends March 31, up from an earlier estimate of 1.0 per cent. It expects 1.5 per cent growth in the coming fiscal year, up from the earlier 1.3 per cent forecast.
 

The government reported Tuesday that industrial output rose in December, helped by strength in manufacturing of passenger cars and auto parts, though the 0.5 per cent month-on-month increase was slower November's 1.5 per cent expansion.

Part of that improvement is due to a weakening in the Japanese yen against the dollar since the November 8 US presidential election, which has raised uncertainty over the future direction of US policies.

The BOJ cited that as one of several risks beyond Japan's control. Others include Britain's plan to leave the European Union, China's economy and other "geopolitical risks."

The central bank is pumping tens of billions of dollars a year into the economy through purchases of government bonds and other assets. The aim is to counter deflation and keep credit cheap, encouraging banks to lend and businesses to borrow more.

That formula, dubbed "Abenomics" for Prime Minister Shinzo Abe, has yielded mixed results. Growth has remained below expectations and inflation stuck near zero, stymieing efforts to "reflate" the economy and compel consumers and businesses to step up purchases to avoid future price hikes.

Data for December showed an uptick in manufacturing output, which rose 0.5 per cent from the month before but was a slower increase than the 1.5 per cent month-on-month increase in November.

Household spending fell 1.5 per cent from the year before in December, and 2.1 per cent from the previous month, despite a 2.3 per cent increase in average real income, which partly resulted from bonuses traditionally paid twice a year in Japan.